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ELEMENTARY  PEINCIPLES 
OF  ECONOMICS  ^ 

TOGETHER  WITH  A  SHORT  SKETCH 
OF  ECONOMIC  HISTORY 

REVISED  ^"^ 

BY 
RICHARD  T.  ELY,  Ph.D.,  LL.D. 

FBOFSBSOS   Ol-   POLITICAL   ECONOMY   IN   THE    UNIVEKSITT 
OF   WISCONSIN 

AJSTD 

GEORGE   RAY  WICKER,  Ph.D. 

FK07X880B  OF  ECONOMICS  IN  DAKTMOUTH  COLLEGE 


>  »  » -J 


' •  •   >  > ••  • 


THE   MACMILLAN   COMPANY 

LONDON:  MACMOLLAN  &  CO.,  I/td. 

1919 

AU  rightt  nursed 


Ecoa.  Dept.  Ucou.  i.i.  Main  Library 

OoraUOBT,  1904  AKD  1»17, 

bt  the  macmillan  company. 

Set  up  .ad  electrotyped.     PublUhed  May,  1904. 


a 


,i(^'^ 


•  ••• 


Ifflttoaati  IPufi 

J.  S.  OMhlof  Co.  —  Berwick  A  Smith  Oo. 

Horwood,  Mm*.,  U.S.A. 


PREFACE  TO  THE  FIRST  EDITION 

In  offering  this  textbook  to  teachers  and  students  of 
economics,  the  authors  feel  that  a  brief  word  of  expla- 
nation and  suggestion  may  afford  help  in  judging  the 
quality  of  the  book  as  well  as  in  the  use  of  the  book, 
should  favoring  judgment  result  in  its  adoption  for  class- 
room work. 

It  has  been  the  aim  of  the  authors  first  of  all  to  make 
the  book  teachable.  In  choice  and  rejection  of  substan- 
tive and  illustrative  material  and  in  its  arrangement ;  in 
the  form  of  the  chapters,  paragraphs,  sentences,  and  words ; 
in  all  that  can  affect  the  ease  or  difficulty  of  conveying  an 
understanding  of  economics  to  the  beginner,  this  compli- 
cated quality  of  teachableness  has  been  earnestly  and  con- 
stantly sought. 

Fortunately  for  the  welfare  of  the  science  of  economics, 
there  is  more  or  less  disagreement  among  economists  as 
to  many  points  of  theory.  But  manifestly  an  elementary 
textbook  on  the  subject  is  not  a  place  in  which  conflicting 
views  should  be  presented  and  discussed,  even  if  space 
would  permit.  Nor  have  the  authors  wished  to  use  the 
pages  of  the  book  for  the  propagation  of  views  in  which 
they  might  chance  to  differ  with  other  economists.  It 
has  seemed  best  to  regard  constantly  the  purpose  of  the 

▼ 

41G649 


vi  PREFACE  TO  THE  FIRST  EDITION 

book  as  a  text,  and  hence  to  subordinate  individual  opin- 
ion to  the  general  good  of  the  student.  Here,  as  in  many 
another  question  of  choice.  Pope's  rule  may  well  apply  :  — 

**  Be  not  the  first  by  whom  the  new  is  tried. 
Nor  yet  the  last  to  lay  the  old  aside." 

In  the  main,  therefore,  and  so  far  as  the  authors  have 
been  able,  they  have  presented  the  outlines  of  theory  in 
the  form  in  which  they  are  to-day  most  generally  accepted 
by  economists,  leaving  for  later  and  advanced  study  the 
coaflicting  assumptions  and  arguments  and  points  of  view 
of  economists  who  may  be  paving  the  way  for  the  most 
acceptable  textbook  of  a  coming  decade. 

An  examination  of  the  book  will  show  that  scattered 
passages,  amounting  in  the  aggregate  to  many  pages,  have 
been  printed  "solid,"  i.e,  without  the  interlinear  spaces 
regularly  used.  Such  are  the  passages  which,  either  from 
their  greater  difficulty  or  from  their  subsidiary  character, 
may  best  be  omitted  by  a  teacher  pressed  for  time.  More- 
over, for  classes  in  which  the  time  limits  are  too  narrow 
to  permit  careful  study  of  the  whole  text,  it  may  be  found 
expedient  to  omit  Book  IV,  on  Public  Finance. 

It  is  perhaps  unnecessary  to  add  the  word  of  caution 
that  the  summaries  and  questions  at  the  close  of  the  chap- 
ters may  easily  become  a  hindrance  rather  than  a  help  to 
real  thought  and  study  if  the  teacher  permit  himself  or 
his  class  to  fall  into  slavish  reliance  upon  them.  Like  the 
references  to  collateral  reading,  the  questions  and  sum- 
maries are  to  be  used  as  starting  points  and  guides  to 
farther  study  and  discussion. 

It  has  been  the  hope  of  the  authors,  moreover,  that  the 
materhii  oarefolly  elaborated  in  the  appendixes  may  not 
only  halp  to  guide  both  teacher  and  class  during  the 


PREFACE  TO  THE  FIRST  EDITION  vii 

period  of  the  formal  study  of  the  book,  but  may  also  en- 
courage and  direct  the  student  in  the  after  days  of  his 
professional  or  business  or  political  life. 

RICHARD  T.  ELY, 
GEORGE  RAY  WICKER. 
Hahoveb,  N.  H., 
1904. 


\ 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/elementaryprinciOOelyrrich 


PREFACE  TO  THE  SECOND  EDITION 

The  reception  accorded  this  book  in  the  thirteen  years 
since  its  first  publication,  a  reception  which  has  gratified 
even  more  than  it  has  surprised  the  authors,  perhaps  justi- 
fies a  word  of  appreciative  acknowledgment  to  the  thou- 
sands of  teachers  who  have  contributed  to  its  success. 
They  may  share  the  authors'  gratification  in  knowing  that 
a  Japanese  translation  has  found  wide  acceptance  in  the 
schools  of  Nippon  ;  that  the  regular  edition  has  been  used 
in  England,  Canada,  Australasia,  and  other  English-speak- 
ing lands ;  and  that  more  recently  Mr.  L.  L.  Price,  the 
distinguished  English  economist,  has  revised  the  book, 
and,  by  utilizing  more  fully  the  national  experience  of 
the  United  Kingdom  and  employing  English  monetary 
terms  and  illustrations,  has  adapted  it  better  to  the 
schools  of  our  British  cousins.  The  authors  in  this  re- 
vision have  availed  themselves  in  various  places  of  im- 
provements in  style  and  substance  made  by  Mr.  Price, 
and  gladly  acknowledge  their  appreciation  and  their 
indebtedness  to  him. 

So  wide  an  acceptance  has  proved  to  the  authors  at 
once  a  challenge  and  a  menace :  a  challenge  to  their  best 
efforts  in  making  the  book  better;  a  menace  in  the  fear 
lest  in  some  subtle  way  their  best  efforts  at  improvement 
might  go  astray.  Bold  caution  seems  to  be  the  injunction 
laid  upon  them  by  the  measure  of  their  earlier  success. 

ix 


X  PREFACE  TO  THE  SECOND  EDITION 

All  descriptive  and  illustrative  material  has  been  very 
carefully  recast,  except  in  the  few  cases  where  it  was  evi- 
dent that  the  older  illustration  was  to  be  preferred.  The 
theoretical  treatment  has  been  as  carefully  reconsidered. 
Wherever  a  simpler,  clearer,  better  statement  could  be 
devised,  the  old  has  given  place  to  the  new.  Wherever 
changes  of  theory  have  won  their  way  into  general  accept- 
ance within  the  last  decade,  there  has  been  no  hesitation 
or  reluctance  in  adopting  the  change.  Truth  may  be 
eternal,  as  Lowell  wrote :  — 

"  but  her  effluence, 
With  endless  change,  is  fitted  to  the  hour." 

One  limitation,  seriously  felt  by  the  authors,  they  have 
not  been  able  to  break  down  or  evade.  Several  lesser 
topics,  vital,  timely,  and  often  closely  related  to  the  eco- 
nomics of  our  country,  —  such  as  immigration,  the  con- 
servation of  natural  resources,  and  the  economic  position 
of  women, — could  find  admission  only  by  an  impracticable 
enlargement  of  the  book  or  by  displacing  other  material 
which  seemed  to  have  at  least  equal  claim  to  inclusion. 
Selection  was  demanded.  Here  critic  and  author  should 
alike  be  bound. 

The  kind  criticism  of  a  host  of  students,  teachers,  and 
friends,  and  the  particular,  searching,  and  good-natured 
criticism  of  some  thousands  of  the  junior  author's  own 
students  in  Dartmouth  College,  the  corpus  vile  sed 
dilectum  of  his  experiments  in  teaching  during  sixteen 
college  generations,  should  show  its  influence  in  this 
revision;  we  hope  and  confidently  believe  that  such  an 
influence  will  be  traced.  More  particular  acknowl- 
edgment is  due  to  Professors  F.  H.  Dixon  and  C.  A. 
Phillips,  and  Mr.  J.  M.  Shortliffe,  of  Dartmouth  College, 


PREFACE  TO  THE  SECOND  EDITION  xi 

who  have  brought  their  own  experience  in  using  the  earUei 
text  as  their  contribution  to  the  common  purpose  of  shap- 
ing a  book  that  may  best  fit  the  needs  of  American  stu- 
dents in  school  and  college. 

RICHARD  T.  ELY, 
GEORGE  RAY  WICKER. 


PREFATORY  NOTE  BY  THE  SENIOR  AUTHOR 

While  Professor  Wicker  and  I  have  both  worked  hard 
and  long  on  this  book,  going  over  it  together  word  by 
word,  discussing  it  at  length  point  by  point,  I  deem  it 
only  fair  to  say  that  the  major  portion  of  the  toil  has 
been  his,  that  to  him  belongs  the  final  literary  form  of 
nearly  the  whole  work,  and  that  to  him  is  due  chiefly  the 
credit  for  whatever  improvements  in  style  and  theory  this 
edition  shows  over  the  first. 

RICHARD  T.  ELY. 

MaDUOV,    WiSCONgIN, 

Jane,  1917. 


BOOK  I 

INTRODUCTORY 

CHAPTER  I 

PRELIMINARY   REMARKS   ON   THE   NATURE   OF 
ECONOMICS 

Although  the  whole  book  which  follows  is  but  an  expanded 

definition  of  economics,  the  student  who  is  about  to  enter 

upon  a  study  of  the  subject  may  well  wish  to  have  explained 

to  him  in  advance,  at  least  in  rough  outlines,  what  is  the  field 

into  which  he  is  about  to  enter.     At  the  outset,  therefore,  let 

js  attempt  to  frame  some  idea  of  the  nature  of  the  science 

id  of  the  group  of  sciences  with  which  it  is  most  closely 

*  ^nected. 

'he  Place  of  Economics  among  the  Social  Sciences. — 

•st  of  all,  economics  is  a  social  science.    That  is,  it  deals 

th  man  in  his  relation  to  society.    But  there  are  other 

3ial  sciences  besides  that  which  we  are  about  to  study; 

long  them  history,  political  science,  and  sociology. 

The  question  therefore  naturally  arises,  How  is  our  science 

tinguished  from  the  others  ?    To  answer  this  question,  we 

st  consider  more  closely  the  different  aspects  under  which 

;iety  may  be  viewed.     From  the  first,  men  in  society  have 

^'  en  busy  in  various  lines  of  effort,  which  for  convenience 

II- »  may  group  as  follows :  language^  art,  education,  religion, 

B  1 


2  ELEMENTknt'PmNCIPLES  OF  ECONOMICS 

JFitttiiiy*  llf^,  Socral  life,  -^  in  the  narrow  sense  of  that  term,  — 
political  life,  and  economic  life.  It  is  with  the  last  of  these 
eight  spheres  of  human  activity  that  our  science  has  to  deal. 
By  the  term  "  economic  life  "  is  meant,  roughly  speaking, 
that  part  of  human  activity  which  is  devoted  to  getting  a 
living. 

A  p>eculiar  feature  of  these  activities  is  that  they  are  all 
collective;  that  is,  they  are  activities  which  one  man  cannot 
well  carry  on  alone.  In  the  case  of  family  and  political  life 
and  some  of  the  others  this  is  at  once  obvious.  Careful  ex- 
amination shows  it  to  be  true  of  them  all.  It  is  for  this  reason 
that  the  sciences  which  deal  with  them  are  called  social 
sciences. 

Preliminary  Defmtion  of  Economics.  —  Economics,  then, 
is  the  science  which  treats  of  those  social  phenomena  that  are  due 
to  the  wealth-getting  and  weaUhr-using  activities  of  maru  It  deals 
with  all  those  facts  about  society  that  result  from  man's 
effort  to  get  a  living.  The  wealth-getting  activity  itself  we 
call  economic  activity.  The  economic  life,  or  the  relations  to 
which  the  economic  acti\ity  gives  rise,  we  may  call  by  the 
simple  word  **  economy ."  With  this  understanding,  we  may 
say  that  economics  is  the  social  science  thai  deals  with  the  eco- 
nomic life,  or  the  economy,  of  man. 

The  Economic  Unit.  —  If  we  keep  in  mind  this  meaning  of 
the  term  "economy,"  we  shall  see  that  there  are  economies  of 
various  sorts.  Thus,  the  economy  of  the  ancient  Greek  house- 
hold, with  its  slaves  and  dependents,  is  different  from  that  of 
the  medieval  city  or  of  the  modern  nation.  In  this  book 
we  study  the  economy  of  the  world  or  the  nation  as  a  unit, 
with  indi\4dual,  household,  city,  and  state  as  subordinate 
eoonomies. 

The  eight  different  human  activities  which  have  been 
eoumerated  cannot  be  entirely  separated  in  thought  any 


REMARKS  ON   THE  NATURE  OF  ECONOMICS        3 

more  than  they  are  actually  separate  in  real  life.  Thus  legis- 
lation, though  it  belongs  primarily  to  the  province  of  political 
science,  has  an  intimate  bearing  on  economic  life.  Again, 
industry  in  Russia  is  seriously  hampered  by  the  frequent 
recurrence  of  saints'  days,  which  have  therefore  great 
economic  importance;  and  even  in  Bavaria  within  a  few 
years  the  number  of  saints'  days  was  lessened  by  action  of  the 
state  with  the  approval  of  the  church ;  but  saints'  days  have 
primarily  to  do  with  religion,  not  with  economics.  In  the 
same  way,  economic  life  is  dependent  upon  all  the  other 
groups  of  human  activity. 

Final  Definition  of  Economics.  —  It  is  evident,  then,  that  a 
complete  definition  of  economics  must  be  made  broad  enough 
to  take  note  of  this  fact.  We  may  sum  up  all  these  considera- 
tions in  a  final  definition,  as  follows :  Economics  is  the  science 

(1)  which  treats  of  those  social  phenomena  that  are  due  to  the 
wealth-getting  and  wealth-fusing  activities  of  man;  -  and  which 

(2)  dsals  with  all  other  phases  of  his  life  in  so  far  as  they 

affect  his  social  activity  in  this  respect) 

>      \         : 

SUMMARY 

1.  Economics  is  a  social  science. 

2.  Each  great  department  of  social  life  has  its  appropriate  science. 

3.  Economics  is  the  branch  of  social  science  that  deals  with  the 

phenomena   to   which   the   wealth-getting   and   wealth-using 
activities  of  men  give  rise. 

4.  Economics  deals'  also  with 'all  the  other  social  phenomena  in  so 

far  as  they  affect  economic  activity. 

QUESTIONS  FOR  RECITATION     ^-f^t^Vf^]        ' 

1.  Into  what  different  groups  maymanis  social  activities  be  divided  ? 

2.  With  which  group  does  economics  primarily  deal?  .  ]?5^*  ^^'' 

cern  has  it  with  the  others?  ^!^-  ,  .,        \  -"-/.^C  AA^i  y'  '•>'  '\^^ 

3.  What  have  the  different  groups  in  common?      hV^^^^'l         '  '  '^ 

4.  What  is  economics?  '  ^  tu^M^y^  OsS^-^  .^^^ 


ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


QUESTIONS  FOR  STUDY  AITO  DISCUSSION 

1.  Name  five  of  the  most  important  public  questions  of  to-day. 

What  ones  are  primarily  economic?     Trace  indirect  economic 
relations  of  the  others. 

2.  How  large  a  part  of  our  lives  is  concerned  with  matters  that  are 
itially  and  directly  economic? 


LITERATURE 

The  teacher  may  find  it  advisable  to  supplement  the  text  of 
this  chapter  with  a  discussion  of  the  meaning  of  science  and  other 
broad  and  fundamental  concepts.  As  a  basis  for  such  discussion, 
Karl  Pearson's  Grammar  of  Science  is  unexcelled. 


CHAPTER  II 
THE  PRINCIPAL  DIVISIONS  OF  ECONOMICS 

Economics  is  a  science  which  covers  so  wide  a  field  that 
it  has  been  found  desirable  to  divide  it  into  parts,  each  of 
which  is  often  treated  by  writers  in  separate  works  or  in 
separate  volumes  of  the  same  work.  It  may  help  the  student 
to  have  outlined  for  him,  in  advance,  the  divisions  as  they 
will  be  presented  in  this  work. 

First  of  all,  it  has  been  thought  best  to  present  to  the 
student  in  the  opening  chapter  an  idea  of  what  the  science 
is,  and  to  show  him,  as  is  being  done  in  the  present  chapter, 
what  are  the  main  topics  with  which  the  science  is  concerned. 
In  another  introductory  chapter  there  is  presented  a  discus- 
sion of  some  of  the  fundamental  institutions  in  our  social 
order. 

In  the  second  place,  it  is  thought  advisable  to  give  in 
a  few  chapters  a  skeleton  outline  of  the  economic  history  of 
mankind,  with  more  particular  attention  to  those  late 
developments  in  English  and  American  economic  history 
that  have  given  rise  to  existing  economic  conditions.  This 
part  of  the  subject  is  often  omitted  from  elementary  text- 
books, and  therefore  a  word  of  explanation  is  here  in  place. 

Few  students  undertake  the  systematic  study  of  economics 
without  having  pursued  courses  in  history ;  but  the  histories 
usually  studied  in  schools  are  devoted  in  great  part  to  other 
than  economic  considerations,  and  are  written  from  another 
point  of  view  than  that  which  should  be  ours  in  our  present 
study.     It  is  of  the  utmost  importance  that  the  student 

5 


6         ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

should  approach  the  study  of  present  economic  conditions 
imbued  with  the  historical  spirit.  \As  the  chapters  on 
economic  history  will  show,  social  and  economic  institutions 
are  not  pennanent,  but  constantly  changing ;  and  to  under- 
stand aright  what  is,  we  must  know  whence  it  has  developed, 
and,  so  far  as  we  can,  whither  it  is  tending.  Moreover,  the 
study  of  economic  history  should  show  the  student,  as  per- 
haps notliing  else  can,  that  great  changes  in  the  economic 
coudition  of  a  nation  or  a  class  do  not  come  about  in  a 
moment  at  the  conmiand  of  an  individual  or  of  a  great  number 
of  men  organized  in  a  state,  though  the  will  and  the  action 
of  individual  and  state  are  powerful  forces.   ^ 

The  way  will  thus  be  made  clearer  for  that  which  is  more 
commonly  presented  in  textbooks  under  the  name  of 
economics  or  pohtical  economy.  1  An  analysis  of  economic 
phenomena  at  any  time  shows  that  these  may  be  divided 
for  purposes  of  clearer  study  into  four  main  parts:  first, 
those  connected  with  man's  consumption  of  goods,  or,  in 
other  words,  with  the  satisfaction  of  his  wants;  second, 
those  connected  with  the  production  of  goods ;  third,  those 
connected  with  the  exchange  or  transfer  of  goods  among 
men ;  and  fourth,  those  connected  with  the  distribution  of 
the  income  of  society  among  the  individuals,  classes,  and 
factors  of  production  which  coop)erate  to  create  that  income. 
By  dividing  thus  the  general  subject  of  economic  theory, 
we  are  enabled  to  look  at  man's  economic  life  from  four 
points  of  view.  The  four  divisions  which  we  have  indicated 
are  usually  treated  under  the  following  headings :  consump- 
twUt  production^  transfers  or  exchange,  and  distribution,  and 
we  shall  discuss  them  in  that  order." 

Certain  socio-economic  problems  of  great  present  interest 
will,  on  account  of  their  special  importance,  be  treated  at 
considerable  length  in  those  divisions  of  the  general  subject 


THE  PRINCIPAL  DIVISIONS  OF  ECONOMICS        7 

to  which  they  have  a  logical  relation.  Thus,  under  the  head 
of  transfers  or  exchange,  we  shall  discuss  the  subjects  of 
monopolies,  bimetallism,  and  protective  tariffs,  and  under 
the  head  of  distribution,  many  of  the  practical  problems 
concerning  labor  and  wages. 

Finally,  the  financial  relations  and  operations  of  govern- 
ment, national,  state,  and  local,  are  of  a  nature  so  important 
to  the  welfare  of  the  citizen,  and  in  some  respects  so  peculiar, 
that  it  is  thought  well  to  treat  them  separately  in  chapters 
devoted  to  the  subject  of  public  finance. 

SUMMARY 

1.  For  convenience  of  treatment,  economics  is  usually  divided  into 

several  different  fields  of  study. 

2.  The  present  book  begins  with  an  introduction  explaining  the 

nature  and  scope  of  the  science. 

3.  A  sketch  of  economic  history  is  given  to  prepare  the  student 

for  a  better  understanding  of  present  conditions  and  problems. 

4.  Economic  theory  is  presented  under  the  four  general  headings : 

consumption,  production,  transfers    (or   exchange),  and  dis- 
tribution. 

5.  A  short  presentation  of  the  subject  of  public  finance  is  added 

to  give  the  student  a  more  complete  idea  of  the  nature  of 
economics. 

QUESTIONS  FOR  RECITATION 

1.  What  subjects  are  discussed  in  the  introductory  chapters  of 

this  book? 

2.  Why  is**t  thought  wise  to  include  economic  history  ? 

3.  What  are  the  usual  main  divisions  of  economic  theory?     In 

what  order  are  they  given  in  this  book  ? 

4.  What  is  the  meaning  of  distribution  as  a  division  of  economics? 

5.  Of  what  does  public  finance  treat  ? 

QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  What  are  the  relations  of  consumption  and  production? 

2.  In  what  sense  is  exchange  a  part  of  production?     In  what 

sense  is  distribution  a  part  of  exchange? 

3.  Name  some  of  the  chapter  topics  in  this  book  which  you  think 

might  properly  have  been  placed  in  other  connections. 


CHAPTER  in 

FUNDAMENTAL  INSTITUTIONS  IN  THE  EXISTING 
SOCIO-ECONOMIC  ORDER 

In  every  civilized  state  to-day  there  are  certain  conditions 
under  which  men  carry  on  their  economic  activities,  so 
fundamental  in  their  nature  that  we  do  not  often  stop  to 
consider  them.  So  deep-lying  are  they  and  so  long  estab- 
lished that  we  easily  fall  into  the  error  of  thinking  of  them 
as  necessary  to  the  very  existence  of  society  under  all  con- 
ceivable circumstances.  Yet  careful  consideration  will  con- 
vince the  student  that  this  is  far  from  the  case.  Let  us,  then, 
consider  in  detail  some  of  the  more  important  of  these  funda- 
mental institutions  in  the  existing  order  of  economic  society. 

\ 

I.   Property 

By  property  we  mean  an  exclusive  right  to  control  an  economic 
good. 

By  private  property  we  mean  the  exclusive  right  of  a  private 
person  to  control  an  economic  good.  % 

By  public  property  we  mean  the  exclusive  right  of  a  political 
unit  {city,  state,  nation,  etc.)  to  control  an  economic  good. 

A.   Private  Property 

The  right  of  private  property  is  so  fundamental  in  our 
modem  civilization  that  we  hardly  think  of  it  as  resting  on 
the  will  or  consent  of  society,  maintained  only  by  constant 

8 


FUNDAMENTAL    INSTITUTIONS  9 

vigilance  on  the  part  of  society,  and  subject  even  now  to 
slow  and  gradual  modification.  Still  less,  perhaps,  has  it  ever 
appeared  to  most  of  us  as  a  right  that  is  open  to  question. 
The  reason  for  this  attitude  of  mind  is  that  people  are  ruled 
in  great  measure  by  custom  rather  than  by  the  light  of  his- 
tory and  of  reason.  When  any  customary  right  has  spread 
very  widely  and  become  deeply  rooted  in  society,  men  fall 
into  the  error  of  calling  it  a  "  naturaljrigbt/^  There  is,  to  be 
sure,  a  sense  in  which  the  property  right  maybe  called  natural, 
namely,  that  the  right  has  been  rather  the  result  of  a  natural 
evolution  than  of  any  conscious  convention.  But,  as  usually 
employed,  the  term  natural  right  implies  that  the  right  is 
"  established  by  nature  "  and  hence  is  not  to  be  called  in 
question.  In  reality  there  are  no  such  rights.  A  man  in 
isolation  could  obviously  have  no  "  rights  "  whatever.  The 
word  rights  necessarily  implies  society,  and  points  to  the 
origin  of  rights  not  in  any  abstract  nature,  but  in  the  group- 
ing of  men.  All  true  rights  are  or  should  be  ra^jypal  — 
rights  which  can  show  good  reason  for  their  claims,  and  can 
justify  their  existence  on  the  ground  that  they  promote 
human  welfare. 

Yet  it  must  be  noted  that  the  very  fact  of  the  longrcon- 
tinued  existence  of  any  social  institution  furnishes  strong 
presumptive  evidence  that  the  institution  has  ministered  to 
social  welfare.  Therefore,  those  who  appeal  to  the  law  or  to 
public  opinion  to  overthrow  or  to  abate  the  force-of  the 
institution  have  to  bear  the  burden  either  of  showing  that 
social  conditions  have  so  changed  as  to  destroy  the  beneficent 
operation  of  the  institution,  or  of  offering  very  strong  evi- 
dence that  some  other  institution  would  better  subserve  the 
end. 

Beginning  of  the  Right  of  Private  Property.  —  On  looking 
into  the  history  of  private  property,  we  find  in  the  first  place 


10       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

that,  as  a  clear  and  distinct  concept,  it  has  not  always  existed 
amcmg  men.  It  is  probable  that  the  sense  even  of  tribal 
ownership  or  property  was  a  slowly  developed  prbduct  of 
civilization.  The  idea  of  private  property  was  of  still  slower 
and  later  growth.  The  savage  at  first  owned  nothing. 
Doubtless,  even  in  very  early  times,  when  the  primitive  man 
had  caught  or  killed  an  animal,  he  considered  it  more  or 
less  his,  though  even  in  such  cases  it  was  the  common  prop- 
erty of  his  family  or  tribe  rather  than  the  exclusive  property 
of  the  individual.  From  insignificant  beginnings,  especially 
from  the  possession  of  personal  articles  of  clothing  and 
adornment,  the  right  or  feeling  of  ownership  has  grown, 
including  more  and  more  things  and  dividing  the  ownership 
more  and  more,  until  at  last  nearly  everything  is  owned  and 
nearly  everyone  owtis  something.  Not  until  a  rather  ad- 
vanced stage  of  civilization  had  been  reached  did  land  be- 
come property,  and  even  to-day  the  last  forms  of  tribal  owner- 
ship of  land  have  not  everywhere,  even  among  civilized 
peoples,  given  place  completely  to  individual  property. 

Strengthening  of  the  Right.  —  In  the  second  place,  it  is 
only  in  comparatively  recent  times  that  private  ownership 
has  been  either  so  exclusive  or  so  extensive  as  it  is  at  present. 
It  is  not  many  centuries  since  a  Scottish  clan  held  the  right 
to  the  territory  it  occupied  so  absolutely  that  no  chieftain, 
however  powerful,  could  abridge  the  right.  To-day,  there 
are  tracts  of  country  in  Scotland  almost  stripped  of  their 
agricultural  population,  with  game  rather  than  men  finding 
a  living  on  these  estates.  Slowly,  however,  a  reaction  has 
set  in,  and  most  nations  are  now  beginning  to  enforce  and 
extend  their  public  claims  and  are  developing  the  social 
side  of  private  property. 

Limitations  to  the  Right.  —  In  the  third  place,  we  find 
that  even  to-day  private  property  has  certain  sharp  limitations 


FUNDAMENTAL    INSTITUTIONS  11 

which  indicate  whence  it  springs  and  from  what  source  it 
draws  its  being.  Society,  through  the  state,  even  now  says 
to  the  individual  citizen,  "  Thus  far  shalt  thou  go,  and  no 
farther."  By  its  action  it  shows  that  it  is  the  grantor  of 
private  rights,  and  that  it  may  withdraw  them  whenever 
such  a  course  will  be  to  its  advantage.  Let  us  consider  some 
of  these  limitations. 

1.  Limitations  to  Private  Property  imposed  by  Society  in 
its  Own  Behalf.  —  1.  Taxation.  —  The  first  of  these  limita- 
tions exists  in  the  taxation  of  private  property,  which  from 
one  point  of  view  may  be  regarded  as  simply  the  taking  by 
organized  society  for  its  own  uses  of  a  part  of  the  value  of 
what  it  has  left  to  the  private  ownership  of  its  citizens. 
Taxation,  as  understood  to-day,  is  a  comparatively  recent 
activity  of  the  state.  During  the  Middle  Ages  the  right  of 
the  state  to  take  private  property  for  its  support  was  stoutly 
opposed,  and  there  was  a  strong  tendency  to  regard  all  taxa- 
tion as  extortion.  To-day  the  right  of  taxation  is  almost 
universally  conceded.  Taxation  is  perhaps  the  most  extreme 
limitation  imposed  upon  the  right  of  private  property  by 
society  in  its  own  behalf. 

2.  Eminent  Domain  and  Requisition.  —  A  second  limita- 
tion exists  in  the  right  of  organized  society  to  appropriate 
to  itself  specific  pieces  of  property  with  direct  coi^pfensation^ 
to  the  private  ownerT  This  right  is  exercised  especially  in 
time  of  war,  as  when  the  nation  for  its  military  needs  takes 
cattle  for  the  subsistence  of  its  troops  or  wagons  for  their 
transportation.  Such  an  assumption  of  proprietorship  is 
known  as  requisition.  But  in  times  of  peace  the  government 
often  takes  for  its  own  purposes,  with  due  compensation, 
land  or  other  property,  under  the  exercise  of  what  is  known 
as  the  right  of  eminent  dotmain,  —  words  which  in  more 
common  language  simply  mean  ultimate  ownership. 


12       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

3.  Fines,  Forfeits,  and  Escheats.  — Fines,  imposed  and 
collected  by  government,  form  a  third  clear  limitation  upon 
the  absoluteness  of  private  property.  A  fine  is  a  money 
payment  exacted  by  the  state  as  a  penalty  for  some  offense 
against  the  law.  When,  instead  of  money,  other  property  of 
the  offender  is  taken,  the  name  forfeit  is  used.  Escheat  is 
the  name  applied  to  property  which  reverts  to  the  state  through 
the  death  of  the  former  owner  without  a  will  and  without  heirs. 
The  word  is  also  used  to  name  the  form  of  reversion  in  such 
cases. 

n.  Limitations  directly  in  Behalf  of  Individuals.  —  The 
three  limitations  just  described  are  such  as  society  sets  up 
directly  in  its  own  behalf.  But  there  are  still  others,  enforced 
by  society  not  directly  for  itself  but  for  individual  citizens. 
(1)  The  first  is  the  exercise  of  the  right  of  eminent  domain  in 
behalf  of  individuals  or  corporations.  If  a  regularly  chartered 
railway  company  is  unable  to  make  terms  directly  with  the 
owner  of  land  over  which  it  proposes  to  lay  its  tracks,  it 
can  secure  possession  by  appealing  to  the  government, 
which  compels  transfer  of  the  property  for  compensation. 
It  should  be  noticed,  however,  that  in  all  such  cases  it  is 
presumed  that  a  superior  public  purpose  is  to  be  served  by  the 
company. 

Moreover,  there  is  a  vast  system  of  limitations  upon  the 
use,  or  rather  the  Abuse,  of  private  property,  which  are 
designed  to  prevent  the  individual  from  injuring  himself  or 
otliers.  We  need  not  enter  into  an  extended  description  of 
these  limitations.  Generally  speaking,  (2)  no  man  may  use 
privcUe  property  to  maintain  a  public  nuisance.  As  the 
Latin  law  phrase  has  it:  Sic  uiere  tuo  ut  alienum  non 
laedas;  i.e.  So  use  your  property  as  not  to  injure  another's. 
Nothing  b  more  fallacious  than  the  idea  that  the  right  of 
owDership  allows  a  person  to  do  as  he  pleases  with  his  prop- 


FUNDAMENTAL    INSTITUTIONS  13 

erty.  It  is  true  that  rights  of  private  property  have 
sometimes  been  so  defined  as  to  permit  many,  abuses  to  go 
unpunished,  but  it  has  been  the  tendency  of  society  so  to 
limit  the  rights  as  to  exclude  abuses.  Whenever  any  given 
right  has  proved  generally  unfavorable  to  the  welfare  of 
society,  society  has  modified  or  abolished  that  right,  or, 
failing  to  do  so,  has  endangered  its  own  stability.  How- 
ever, we  must  frankly  recognize  that,  as  law  operates  in 
accordance  with  general  principles,  many  abuses  exist  that 
cannot  be  remedied  by  law.  The  problem  is  to  prevent 
wrong  use  without  impeding  right  and  desirable  use.  If 
the  student  thinks  seriously  about  this,  he  will  discover  many 
cases  of  a  wrong  use  of  property  which  at  the  same  time 
cannot  be  corrected  by  any  general  rule.  For  if  the  attempt 
is  made  to  form  a  general  rule  to  prevent  the  particular 
abuses,  it  will  be  seen  that  the  same  rule  would  in  many 
cases  prevent  a  right  use.  It  is  within  the  spirit  of  the  law 
to  go  as  far  as  possible  by  general  rule;  as  time  goes  on  we 
learn  how  to  prevent  an  increasing  number  of  wrong  uses  of 
property.  But  after  we  have  done  our  utmost,  there  will 
still  remain  a  large  field  of  wrong  uses  which  can  be  cor- 
rected only  by  individual  action  or  by  associated  efforts 
of  a  private  sort. 

B,   Public  Property 

Public  property,  as  defined  above,  refer*  to  an  exclusive 
control  of  some  political  authority  and  is  a  very  different 
thing  from  free  goods,  because  the  laws  of  property,  as  for 
instance  \hose  regarding  theft,  apply  quite  as  stringently  to 
public  as  to  private  property,  sometimes  even  more  so.  The 
sharpness  of  the  law  of  public  property  in  the  post  office  is 
well  known. 


14       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

It  is  one  of  the  defects  of  current  discussions  of  property 
that  the  concept  of  public  property  has  been  treated  in- 
adequately by  economists  and  publicists  generally,  with 
the  result  that  false  and  one-sided  conclusions  have  been 
drawn.  Distribution  depends  on  public  as  well  as  on  pri- 
vate property,  and  the  interrelations  of  these  two  are  vital 
in  any  given  distribution  of  wealth. 

But  it  must  be  borne  in  mind  that,  strictly  speaking, 
property  refers  to  rights  only.  Property  is  an  exclusive 
right.  Speaking  accurately,  then,  property  is  not  a  thing, 
but  the  rights  which  extend  over  a  thing.  A  less  strict  use 
of  the  word  property  makes  property  include  the  things  over 
which  the  right  extends.  We  say  of  a  farm,  "This  is  my 
property,"  meaning  the  land  and  improvements  on  it  and 
not  merely  the  rights  in  them.  But,  strictly  speaking, 
property  is  the  right,  and  not  the  object  over  which  the  right 
extends. 

n.   Guaranteed  Privileges 

Closely  connected  with  the  general  subject  of  property 
is  the  legal  arrangement  whereby  exclusive  privileges  are 
awarded  in  return  for  services  to  society.  Such  privileges 
really  become  a  special  form  of  private  property.  Their 
particular  importance  is  in  determining  the  distribution  of 
wealth,  but  they  are  not  without  importance  also  in  the 
production  of  wealth,  on  account  of  the  stimulus  which  the 
hope  of  such  privileges  may  give  to  invention  and  improve- 
ment. 

Chief  among  guaranteed  privileges  are  patents  and  copy- 
rights. Society,  in  all  modem  nations,  grants  patents  to 
inventors  of  mechanical  devices  and  copyrights  to  authors  of 
literary  or  other  artistic  productions.     Copyright  is  extended 


FUNDAMENTAL    INSTITUTIONS  16 

not  only  to  books,  pamphlets,  and  the  like,  but  also  to  marks 
or  names  designed  to  distinguish  certain  products  in  the 
market. '  Such  copyrighted  trademarks  have  been  of  great 
economic  importance  in  recent  years. 

Most  modern  states  proceed  on  the  assumption  that  the 
public  interest  will  be  furthered  by  granting  these  exclusive 
privileges,  and  it  is  generally  agreed  that  the  policy  has 
been  justified  by  its  results.  Yet  experience  has  shown 
that  neither  patents  nor  copyrights  should  be  given  without 
limitations.  Patents  should  not  be  given  on  light  arid 
trivial  grounds,  nor  for  unlimited  or  overlong  periods.  More- 
over, owners  of  patents  should  be  made  by  law  either  to  use 
them  or  to  allow  them  to  lapse,  and  to  grant  to  others  the 
right  to  use  them  on  payment  of  a  reasonable  royalty. 
Similarly,  copyrights  are  carefully  guarded  in  the  interests 
of  the  public.  The  law  in  a  general  way  aims  to  give  the 
reward  of  services  to  the  author,  and  avoids  allowing  a 
reward  for  services  which  others  have  performed. 

III.   Contracts 

Another  fundamental  institution  in  our  present  industrial 
society  is  contract.  Contract,  while  logically  a  separate 
right  from  that  of  property,  naturally  flows  from  it,  and  is 
usually  regarded  as  in  reality  an  incident  of  property  or  one 
of  the  bundle  of  rights  of  which  property  in  general  consists. 
Thus  property,  in  the  absence  of  limitation,  is  assumed  to 
include  the  right  to  contract  for  the  use  or  sale  of  the  thing 
owned.  Some  sort  of  contract  lies  at  the  basis  of  all  asso- 
ciated action.  That  this  condition  of  associated  activity 
should  be  maintained  by  the  state  can  hardly  be  doubted, 
yet  even  the  right  to  contract  has  its  limitations  resting 
upon  human  well-being.    To-day  legislation  proWdes  (1) 


16       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

who  may  and  who  may  not  contract,  (2)  for  what  purposes 
vaUd  contracts  may  be  made,  and  (3)  mider  what  forms  and 
conditions  they  must  be  made  to  be  valid.  Experience 
justifies  this  regulation.  Children,  for  example,  cannot  as 
a  rule  make  contracts  that  will  bind  themselves,  because 
they  are  not  presumed  by  the  law  to  have  the  requisite 
knowledge  and  judgment.  Again,  agreements  which  are 
clearly  opposed  to  public  policy,  such  as  an  agreement  entered 
into  for  the  commission  of  a  crime,  are  invalid  and  would 
not  be  enforced  by  the  courts. 

IV.   The  Right  to  Establish  Private  Enterprises 

The  right  to  establish  private  enterprises  is  another 
fundamental  one  which  is  nevertheless  changing  and  change- 
able. It  is  only  within  the  last  century  that  the  right  has 
come  to  have  its  present  wide  scope,  especially  in  the  case 
of  corporations.  Many  restrictions  indeed  exist,  as  in  the 
case  of  the  liquor  traflSc ;  while  in  the  field  of  the  so-called 
public  utilities,  —  railways,  lighting  works,  etc.,  —  restric- 
tions have  so  increased  recently  that  it  is  generally  necessary 
to  secure  special  authorization  to  establish  a  new  enterprise. 
It  b  still  open  to  serious  question,  however,  whether  society 
has  not  gone  too  far  in  our  own  country  in  the  direction  of 
granting  freedom  to  establish  private  business. 

V.   Personal  Liberty 

Personal  liberty  or  freedom,  including  (1)  the  right  to  move 
from  place  to  place  at  pleasure,  and  (2)  the  right  ofacquisitimi, 
—  that  is,  the  right  to  acquire  property,  —  is  an  institution 
which  we  are  perhaps  most  likely  to  regard  as  necessary 
and  natural  under  all  circumstances.    Yet  here  again  we 


FUNDAMENTAL    INSTITUTIONS  17 

have  the  case  of  a  right  which  has  been  very  slowly  acquired 
by  society.  Moreover,  it  never  has  been,  is  not  to-day, 
and  probably  never  can  be,  an  unlimited  right.  It  is  the 
endeavor  of  society  to  equalize  human  liberty,  not  to  make 
such  liberty  absolute,  for  that  would  be  impossible.  The 
question,  then,  is  not  whether  we  shall  limit  liberty,  but  how 
we  can  so  limit  it  that  we  may  secure  a  maximum  of  liberty 
for  all. 

The  Basis  of  Human  Rights.  —  What,  then,  is  the  basis  of 
human  rights  ?  The  preceding  discussion  should  have  made 
it  clear  that  rights  do  not  come  from  nature  in  the  sense  that 
they  thus  gain  a  standing  and  authority  independent  of 
the  will  or  consent  of  society.  Neither  are  such  rights 
absolute  or  inherent,  though  these  words  have  often  been 
mistakenly  used  in  describing  them.  Private  property, 
contract,  personal  liberty,  and  all  the  other  "  rights  of  man  '\ 
must  justify  themselves  by  proving  that  they  promote  the 
highest  welfare  of  mankind.  As  the  Latin  phrase  has  it, 
"  Salus  puhlica  suprema  lex.'*  Some  of  us  may  believe  that 
it  is  in  the  "  very  nature  of  things  "  that  personal  liberty, 
for  example,  will  best  serve  human  welfare,  but  we  cannot  ask 
or  expect  others  to  take  this  for  granted  on  our  unsupported 
assertion.  And  when  we  admit  that  we  must  prove  the 
social  beneficence  of  private  property  or  personal  liberty, 
we  have  already  practically  abandoned  the  **  natural  rights  " 
argument  in  the  dogmatic  form  already  described.  Practi- 
cally speaking,  therefore,  we  may  all  agree  that  the  basis  of 
human  rights  is  social  expediency,  —  the  proved  power  to 
promote  the  well-being  of  men  in  society. 

The  student  must  think  this  out  fairly  and  deliberately. 
Only  when  he  has  substituted  for  bare  dogmatism  the  rule 
of  human  welfare  will  he  be  prepared  to  study  economic 
questions  rationally  and  scientifically. 


18       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

For  the  maintenance  of  these  fundamental  conditions  of 
the  existing  social  order  which  we  have  described,  we  are 
dependent  upon  the  political  organization  of  society,  which 
we  know  as  the  state.  No  other  instrument  of  society  is 
adequate  to  the  task.  The  maintenance  of  these  foundations, 
if  they  are  to  be  maintained  at  all,  can  be  accomplished  in 
no  other  way.  When  the  state  attempts  this  and  little  more, 
its  policy  is  said  to  be  passive.  The  French  phrase,  "  laissez- 
faire,"  meaning  **  let  alone  "  or  "  hands  off  ",  is  most  fre- 
quently used  to  characterize  this  purely  passive  policy. 
When  the  state  goes  far  beyond  this  in  endeavors  to  promote 
the  general  welfare,  its  policy  is  said  to  be  active. 

Conclusion.  —  Let  us  remember,  then,  that  the  most 
fundamental  institutions  are  not  unchangeable,  but  that  we 
can  discover  their  beginnings  in  history,  and  can  trace  their 
development  through  manifold  and  unceasing  changes  to 
their  present  form.  Let  us  remember,  too,  that  as  change 
has  marked  the  past,  so  it  must  mark  the  future ;  and  that 
the  institutions  which  we  have  described,  fundamental  as 
they  are,  derive  their  rational  justification  from  their  power 
to  promote  human  well-being.  Bearing  these  facts  in  mind, 
we  may  free  ourselves  from  two  errors,  each  an  extreme  one, 
from  which  many  false  views  of  our  future  take  their  rise. 
On  the  one  hand,  we  may  hope  to  escape  the  pessimism  that 
springs  from  looking  at  the  existing  order  of  things  as  un- 
alterably determined ;  and,  on  the  other  hand,  we  may  escape 
that  unreasoning  and  unreasonable  optimism  which  belittles 
the  importance  of  our  fundamental  rights  and  institutions, 
and  which  inconsiderately  hopes  to  change  these,  in  the 
twinkling  of  an  eye,  by  the  simple  expedient  of  a  royal  edict 
or  a  majority  vote  of  a  sovereign  people. 


FUNDAMENTAL    INSTITUTIONS  19 


SUMMARY 

1.  There  are  certain  ideas  and  institutions  in  our  social  order  which 

are  so  fundamental  that  we  come  to  regard  them  as  "nat- 
ural" and  necessary. 

2.  Among  these  fundamentals  are  property,  —  public  and  private, 

—  guaranteed  privileges,  contract,  thQ  right  to  establish  busi-" 
ness  enterprises,  and  personal  freedom. 

3.  Far  from  being  absolute  or  natural  and  necessary  to  every  state 

of  society,  these  rights  have  always  been  limited,  have  always 
been  changing,  and  have  their  origin  and  justification  in 
social  expediency. 

4.  History  warns  us  neither  to  overestimate  nor  to  underestimate 

the  importance  of  these  institutions.  They  may  be  changed, 
but  they  cannot  be  changed  easily  or  quickly. 

QUESTIONS  FOR  RECITATION 

1.  What  is  private  property?     Why  is  it  often  held  to  be  a  right 

that  is  not  open  to  question  or  discussion? 

2.  What  is  the  basis  of  human  rights?     Are  any  of  them  exempt 

from  the  need  of  examination  or  justification? 

3.  What  is  the  historical  origin  of  private  property? 

4.  What  limitations  does  the  state  set  to  private  property?     Is 

the  present  tendency  toward  an  increase  or  a  decrease  of 
these  limitations  ? 

5.  Ought  private  property  to  be  retained  ?     If  so,  why  and  how  far  ? 

6.  What  is  a  trade-mark?     A  copyright?     A  patent?     Discuss 

their  purpose  and  results. 

7.  What  limitations  are  properly  set  to  the  right  of  personal  free- 

dom?    Of  what  does  the  right  to  personal  freedom  consist? 

8.  From  what  two  extreme  errors  ought  a  true  idea  of  fundamental 

institutions  to  guard  us? 

QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  Has  a  murderer  a  "right  to  live"?     If  so,  is  it  a  "  natural  right "  ? 

2.  Is  it  the  argument  of  natural  right  or  of  social  expediency  that 

has  led  many  societies  to  give  up  the  death  penalty  ? 

3.  On  what  basis  would  you  argue  against  slavery  in  the  United 
I    States  to-day? 

4.  A  corporation  exists  only  by  virtue  of  a  charter  granted  by 

society.  Has  a  corporation  a  natural  right  to  hold  prop- 
erty? to  make  contracts? 


20       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

5.  If  human  rights  were  natural,  could  they  logically  be  limited? 

Could  thoir  just  limits  be  discovered  from  nature? 

6.  Does  the  line  between  public  property  and  private  property 

change  according  to  any  general  principle  or  law  ? 

LITERATURE 

Ely,  R.  T. :  Property  and  Contract,  especially  Bk.  I,  Pt.  I,  Chs.  1-3. 
Mill,  John  Stuart:    Principles  of  Political  Economy,  Bk.  II,  Ch.  1, 

§  2,  and  Ch.  2,  §§  1,  5,  6,  and  7. 
Report  of  the  United  States  Commissioner   of  Patents  for  1888. 

(See    also    others    of    the    Patent    Commissioners'    Annual 

Reports.) 
Ritchie,  D.  J. :  Natural  Rights. 


BOOK  II 

A  BRIEF  SKETCH  OF  ECONOMIC   HISTORY 

CHAPTER  I 
INTRODUCTORY 

What  Economic  History  is.  —  In  beginning  the  study  of 
economic  history  it  will  be  well  for  us  to  recall  what  has  been 
said  in  a  preceding  chapter  as  to  the  nature  of  the  subject 
which  is  before  us.  The  history  of  literature,  the  history  of 
government,  the  history  of  religion,  and  other  histories 
which  the  student  can  readily  call  to  mind,  have  one  thing  in 
common :  they  are  all  of  them  histories  of  man.  Each  of 
them  treats  of  man  in  one  particular  line  of  his  activities. 
It  is  the  same  with  economic  history.  Its  subject  is  man, 
but  it  deals  primarily,  not  with  his  government  or  his  wor- 
ship, but  with  his  efforts  to  get  a  living.  Many  who  have 
held  a  narrow  view  of  our  subject  have  objected  sneeringly 
that  it  is  but  a  "  bread  and  butter  '*  science.  Even  if  this 
were  a  just  view  of  the  subject,  economics  would  still  be 
worthy  of  our  most  careful  study.  But,  as  a  matter  of  fact, 
it  means  much  more  than  bread  and  butter.  It  is  plain  on  a 
moment's  reflection  that  every  kind  of  activity,  however 
sublime,  depends  to  some  extent  upon  material  things.  And 
so  this  subject  of  ours  —  man  in  his  effort  to  acquire  and 
to  use  material  things,  to  satisfy  his  wants,  or,  in  other 

21 


22       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

words,  to  get  a  living  —  is  of  interest  to  everybody,  and  ia 
closely  connected  with  every  kind  of  human  effort. 

General  Survey.  —  At  the  beginning  of  our  review  of 
the  history  of  man's  economic  efforts  we  are  struck  by  the 
fact  that  all  the  manifold  ways  of  getting  things  may  after 
all  be  reduced  to  two :  man  must  either  find  or  make.  Of 
course  the  two  ways  often  combine  in  varying  proportions, 
and  in  our  own  experience  the  two  are  constantly  shading 
into  each  other ;  but  for  purposes  of  present  clearness  we  may 
well  make  the  distinction.  Now,  uncivilized  man  finds  the 
things  he  uses ;  civilized  man  adds  to  finding  the  art  of  making. 
Indeed,  civilization,  on  its  material  side,  consists  largely  in  want- 
ing  many  things  and  in  learning  how  to  make  and  to  iise  them. 

The  economic  activity  of  man  before  the  dawn  of  recorded 
history  is  enshrouded  in  so  much  of  mystery  that  we  can  do 
little  more  than  conjecture  regarding  it.  We  have  evidence 
to  show  that  prehistoric  man  obtained  his  material  goods, 
as  the  beasts  do,  simply  by  taking  possession  of  natural 
products,  exercising  little  or  no  control  over  nature,  and 
protecting  himself  from  the  elements  only  by  caves  or  by  the 
simplest  of  contrivances. 

Historical  Stages.  —  The  period  of  civilization  just  men- 
tioned is  something  so  remote,  something  about  which  our 
knowledge  is  so  uncertain  and  fragmentary,  that  we  are 
scarcely  able  to  treat  it  as  a  separate  stage  in  economic 
evolution  at  all.  We  may,  therefore,  pass  directly  to  a  study 
of  the  regular  stages,  as  they  have  commonly  been  described 
and  distinguished,  beginning  with  the  time  when  men  had 
learned  to  kindle  fires,  to  eat  meat,  and  to  live  in  some  kind  of 
political  communities,  however  imperfect.  Starting  thus,  we 
may  conveniently  divide  the  course  of  man's  economic 
development  —  regarding  it  from  the  point  of  view  of  his 
means  of  procuring  goods  —  into  five  stages,  as  follows :  — 


INTRODUCTORY  23 

[1)  Tht  hunting  and  fishing  stage. 

[2)  The  pastoral  or  nomadic  stage. 
;3)  The  agricultural  stage. 

'4)  The  handicraft,  or  trades  and  commerce  stage. 
;5)  The  industrial  stage. 

?rom  the  point  of  view  of  the  changing  size  of  the  domi- 
:ing  economic  unit,  man's  history  falls  into  these  four 
ges:—  ' 

1)  The  stage  of  independent  economy. 

2)  The  stage  of  town  or  local  economy. 

3)  The  stage  of  national  economy. 

4)  The  stage  of  imperial  or  even  world  economy. 

^gain,  looking  at  the  same  development  from  the  point 
ui  view  of  man's  ways  of  exchanging  goods,  we  may  simi- 
larly distii\guish  the  four  following  stages :  — 

(1)  The  stage  of  mutual  giving  of  gifts. 

(2)  The  stage  of  "  truck  "  or  barter  economy. 

(3)  The  stage  of  money  economy. 

(4)  The  stage  of  credit  economy. 

Still  again,  if  we  view  economic  evolution  from  the  point 
of  view  of  labor,  we  have  the  six  following  stages :  — 

(1)  Slaughter  of  enemies  taken  in  battle,  —  no  steady, 
regular  labor. 

(2)  Slavery. 

(3)  Serfdom. 

(4)  "  Free  "  labor,  governed  largely  by  custom  in  the 
making  of  contracts. 

(5)  '*  Free  "  labor,  with  individual  contract. 


24       ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

(6)  "  Free  "  labor,  with  collective  bargaining  and  group 
contract  regulated  increasingly  by  statute. 

These  classifications  may  now  be  brought  together  in  a 
single  table,  in  which  the  historical  relation  of  the  various 
classifications  is  roughly  indicated  by  the  position  of  the 
stages  in  the  parallel  columns. 


Economic  Stages 


From  the  Point  of 
View  of  Produc- 
tion. 

1.  Hunting  and 
Fishing 


2.  Pastoral    or 
Nomadic 

3.  Agricultural 


4.  Handicraft 
or  Trades  and 
Commerce 


5.  Industrial 


From  the  Point  of 
View  of  the  Size 
of  the  Economy. 

1.  Independent 
Economy 


From  the  Point  of 
View  of  Exchange. 


From  ^he   Point  of 
View  of  Labor. 


2.  Town  or 
Local  Econ- 
omy 


3.  National 
Economy 


4.  Imperial  or 
Worid  Econ- 
omy 


1.  Mutual     (  1.  Slaughter  of 


Gifts 

2.  Barter  or 
"Truck" 


3.  Money 


4.  Credit 


Enemies     in 
War 


2.  Slavery 


3.  Serfdom 


4.  "Free "labor, 
customary 
contract 

5.  "Free "labor, 
individual 
contract 

6.  "Free "labor, 
group  con- 
tract 


It  must  not  be  understood  that  these  stages  are  in  any  of 
the  classifications  distinctly  or  sharply  separated,  that  we 
can  fix  definite  dates  at  which  men  consciously  abandoned 
one  way  of  obtaining  goods,  or  of  exchanging  them,  and 
passed  to  another  method.  The  transition  from  one  stage 
to  another  is  slow  and  almost  imperceptible.    Those  students 


^INTRODUCTORY  25 

of  this  book  wL<-  have  studied  botany  or  zoology  will  under- 
stand the  illustration  when  we  say  that  the  stages  shade  into 
one  another  as  do  the  varieties  of  closely  related  genera  in 
the  case  of  living  organisms.  Moreover,  it  must  not  be 
understood  that  all  of  the  features  of  an  earlier  stage  pass 
away  when  men  enter  into  the  newer  way.  In  many  cases 
all  the  features  of  the  old  survive  and  even  have  an  increased 
importance  in  the  later  stage.  Thus  trades  and  commerce 
are  to-day  pursued  on  a  far  larger  scale  than  they  were  in 
the  handicraft  stage  itself;  but  since  then  new  and  im- 
portant features  of  economic  life  have  developed  to  give  a 
new  character  to  the  age,  and  we  seek  to  indicate  this  change 
by  some  distinctive  title.  To-day,  in  the  United  States, 
we  can  find  illustrations  of  nearly  all  the  stages  of  evolution 
that  have  been  mentioned.  Barter,  or  truck,  is  still  the 
commonest  mode  of  exchange  in  some  parts  of  the  country, 
and,  indeed,  there  are  comparatively  few  places  in  which 
credit  transactions  have  in  the  main  taken  the  place  of 
money  transactions.  It  is  interesting  to  observe  that,  owing 
to  the  progressive  western  movement  of  the  population  of 
the  country,  the  stages  in  the  history  of  man's  productive 
efforts  appear  in  regular  order  from  west  to  east.  Thus 
certain  parts  of  the  western  country  are  still  largely  occupied 
by  hunters  and  trappers ;  next  are  great  stretches  of  country 
almost  entirely  devoted  to  grazing ;  farther  east,  agriculture 
predominates ;  trades  and  commerce  are  active  especially  in 
the  country  east  of  the  Mississippi  and  in  the  extreme  west ; 
manufacture  on  a  large  scale  is  found  especially  in  the  North 
Atlantic  and  North  Central  groups  of  States ;  while,  finally, 
the  great  industrial  combinations  that  mark  the  latest  step 
in  development  are  mainly  confined,  at  least  as  far  as  their 
legal  residence  is  concerned,  to  the  Atlantic  seaboard.  It  is 
perhaps  excess  of  caution  to  remind  the  reader  that  the 


26       ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

American  trapper,  cattle  man,  farmer,  and  handicraftsman 
all  find  their  life  greatly  modified  by  their  easy  and  cheap 
intercourse  with  one  another  and  by  their  access  to  the  results 
of  man's  latest  industrial  achievements  in  other  parts  of 
the  world.  But  on  the  other  hand  it  is  interesting  to  note 
that  certain  features  of  their  life  are  reminiscent  of  the 
earlier  unmodified  stages. 

Our  study  of  the  history  of  man*s  economic  development 
may  conveniently  take  the  form  of  a  study  of  the  various 
stages  which  have  been  mentioned,  and  more  especially  of 
the  stages  in  the  history  of  man's  productive  efforts. 

SUMMARY 

1.  Eoonomio  history  is  the  history  of  man  in  his  efforts  to  get  a 

living ;  that  is,  to  get  the  things  needed  for  all  his  activities 
of  body  and  mind. 

2.  Uncivilized  man  finds  things ;  civilized  man  makes  them. 

3.  The  history  of  man  from  the  point  of  view  of  his  productive 

efforts  may  be  divided  into  five  stages:  the  hunting  and 
fishing  stage,  the  pastoral  or  nomadic,  the  agricultural, 
the  handicraft  or  trades  and  commerce,  and  the  industrial. 

4.  Other  subsidiary  classifications  are  based  upon  the  history  of 

the  development  of  the  size  of  the  economic  unit,  the  his- 
tory of  exchange,  and  the  history  of  labor. 

QUESTIONS  FOR  RECITATION 

1 .  What  is  included  in  the  term  * '  living ' '  ?     Mention  some  economic 

elements  in  religious  work.     In  education.     In  poUtics. 

2.  What  two  fundamental  ways  are  there  of  getting  things?     In 

which  way  can  society  get  more? 

3.  What  do  we  know  of  the  economic  life  of  prehistoric  man? 

4.  What  are  the  five  stages  of  economic  progress  from  the  point 

of  view  of  production?  The  four  stages  from  the  point 
of  view  of  transfers?  The  six  stages  from  the  point  of 
view  of  labor?  The  four  stages  from  the  point  of  view 
of  the  size  of  the  economi-s  unit? 

5.  What  can  you  say  of  the  distinctness  of  separation  of  these 

stages? 


INTRODUCTORY  27 


QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  What  do  you  think  is  the  significance  of  the  history  of  man's 

modes  of  getting  a  living  as  compared  with  the  history  of 
his  forms  of  government? 

2.  Which  do  you  think  has  had  the  greater  influence  upon  the 

other  ? 

3.  Can  you  imagine  an  economic  setting  in  which  the  American 

people  could  not  have  been  brought  to  believe  that  human 
slavery  was  wrong  ? 

4.  Did  economic  forces  play  any  part  in  deciding  the  fundamental 

issue  in  the  Civil  War? 

5.  What  is  the  meaning  of  the  phrase  "the  economic  interpretation 

of  history'*? 

LITERATURE 

Bticher,  Carl :   Industrial  Evolution  (translated  from  the  German), 

especially  Chs.  I  and  II. 
Ely,  R.  T. :    Studies  in  the  Evolution  of  Industrial  Society^  Pt.  I, 

Ch.  III. 
Lubbock,  Sir  John :   Prehistoric  Times,  especially  the  last  chapter ; 
.    also  Origin  of  Civilization  and  Primitive  Condition  of  Man. 
Morgan,  L.  H. :  Ancient  Society,  Pt.  I,  Chs.  II  and  III. 
SchmoUer,  Gustav :    The  Mercantile  System,  in  Ashley's  Economic 

Classics,  pp.  1-5. 
Semple,  E.  C. :  Influence  of  Geographic  Environment,  Ch.  I. 
Stanley,  H.  M. :    In  Darkest  Africa,  Vol.  I,  Ch.  VIII;    Vol.  II, 

Chs.  XXIII  and  XXXIII. 


CHAPTER  II 
EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT 

I.   The  Hunting  and  Fishing  Stage 

General  Characterization.  —  In  the  first  stage  of  man's 
economic  development,  nature  is  the  great  factor  in  produc- 
tion. There  is  Httle  labor  and  less  capital.  Labor,  as  we. 
know  it  to-day,  is  beneath  the  dignity  of  the  savage,  and 
was  therefore  assigned  largely  to  the  women.  Man  contents 
himself  with  what  nature  gives  him,  his  labor  taking  the 
form  of  appropriating  these  gifts.  He  has  not  progressed 
far  in  subjecting  animals  to  his  will ;  still  less  does  he  attempt 
to  improve  useful  animals  by  breeduig.  Transforming 
natural  products  by  his  handicraft  is  but  an  insignificant 
part  of  his  activity.  Not  even  does  he  store  up  goods  in 
time  of  abundance  against  a  future  time  of  dearth.  The 
American  Indian,  where  he  has  not  been  elevated  by  contact 
with  a  higher  civilization,  is  a  good  illustration  of  this  stage 
of  economic  progress. 

Economic  activity  in  this  stage  is  in  a  high  degree  isolated. 
Hence  the  hunting  and  fishing  stage,  together  with  the  two 
succeeding  stages,  is  said  to  belong  to  the  period  of  independ- 
ent ecommiy.  In  other  words,  the  work  of  getting  goods  is 
not  carried  on,  as  with  us,  by  great  groups  of  men,  in  many 
countries,  who  exchange  their  products,  but  is  done  mainly 
in  the  single  family,  each  family  producing  all  or  nearly  all 
of  the  things  which  its  members  consume.     For  this  reason, 

28 


EARLY  STAGES  =OF  INDUSTRIAL  DEVELOPMENT     29 

too,  there  is  littL  exchange  or  transfer  of  goods,  though  there 
is  no  unwilUngness  to  make  exchanges  if  opportunity  offers 
to  secure  by  exchange  something  new  and  attractive. 

There  being  Httle  exchange  of  products  or  division  of 
labor,  it  follows  that  there  are  no  economic  classes  and  no 
industrial  conflicts.  The  greater  part  of  property,  iijcluding 
all  land,  is  the  common  possession  of  the  social  group,  private 
property  being  confined  to  arms  of  war,  household  goods, 
and  the  immediate  rewards  of  labor. 

Hunting  Tribes.  —  Although  we  have  grouped  the  hunting 
and  fishing  tribes  together  as  being  upon  the  same  plane 
of  economic  evolution,  we  can  find  certain  clear  differences 
between  those  who  live  primarily  on  the  products  of  the 
chase  and  those  who  get  their  living  mainly  by  fishing. 
Among  hunting  tribes  we  find  the  work  and  life  leading  to 
a  high  development  of  such  qualities  as  cunning,  endurance, 
and  bodily  strength,  but  not  to  a  development  of  technical 
skill  nor  to  reflection  upon  the  processes  of  nature.  Their 
condition  of  life  prevents  the  possibility  of  any  but  a  sparse 
population.  It  has  been  estimated  that  in  this  stage  each 
hunter  requires  for  his  support  more  than  fifty  thousand 
acres,  or  seventy-eight  square  miles,  an  area  which  in  the 
state  of  Rhode  Island  at  present  supports  on  an  average 
more  than  forty  thousand  people.  The  great  world  city  of 
London  has  a  population  almost  three  million  times  as  dense. 
It  follows  from  this  need  of  large  territories  that  war  becomes 
an  economic  necessity  whenever  there  is  not  an  abundance 
of  unoccupied  land.  This  same  condition  of  things  gives  us 
one  of  the  causes  of  cannibalism.  The  pressure  of  increasing 
numbers  bringing  the  people  continually  to  the  verge  of 
starvation,  they  fall  little  by  little  into  the  custom  of  eating 
enemies  taken  in  war. 

Fishing  Tribes.  —  As  might  be  expected,  primitive  tribes 


30       ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

of  fishing  people  are  more  peaceable  than  are  the  hunting 
tribes.  Their  population  is  denser,  both  because  of  their 
more  p>eaceable  disposition  and  because  of  the  fact  that  a 
smaller  area  is  suflScient  for  the  support  of  a  given  number 
of  people  engaged  as  they  are.  Having  less  need  of  frequent 
migrations  to  seek  new  food  resources,  they  naturally  form 
larger  accumulations  of  capital.  They  build  dwellings  of  a 
more  permanent  character,  and  construct  boats  and  fishing 
implements.  On  the  whole,  we  may  say  that  the  power  of 
man  enter  nature  is  greater  among  fishing  than  among  hunting 
tribes.  Primitive  fishing  tribes  can  no\N^  be  found  only  in 
the  frigid  zone.  

II.   The  Pastoral  Stage 

General  Characterization.  —  Between  uncivilized  man, 
who  uses  what  he  finds,  and  civilized  man,  who  makes  what 
he  wants,  there  is  a  middle  ground.  The  man  of  this  middle 
period  neither  depends  alone  on  what  he  can  find,  nor  makes 
things  to  any  great  extent,  as  we  commonly  think  of  making 
things;  but  rather  raises  things;  in  other  words,  he  has 
learned  to  a  limited  extent  to  give  direction  to  the  forces  of 
nature.  He  has  learned  to  produce,  but  he  still  lives  chiefly 
on  the  raw  materials  he  has  coaxed  from  nature,  not  knowing 
how  to  make  them  up.  He  is  learning  to  labor  and  to  save. 
To  be  sure,  he  very  early  learns  the  art  of  making  a  few  simple 
tools  like  bows  and  arrows  and  primitive  stone  implements ; 
but  with  these  few  exceptions,  it  is  worthy  of  note  that  as 
man  learns  to  subdue  nature  he  begins  not  with  dead  nature, 
—  not  with  inaninii^te  ^ngs,  —  but  with  living  or  animate 
nature;  he  uses,  not  iBtals,  but  animals  and  plants,  and 
learns  to  increase  their  amount  by  artifice.  Moreover,  of 
these  two  classes  of  living  things,  he  first  subdues  the  higher 


EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT     31 

form  of  life,  —  mat  which  more  nearly  resepables  his  own,  — 
and,  as  a  general  rule,  not  until  long  afterward  does  he  learn 
to  exercise  any  considerable  control  over  plant  life  for  his 
uses. 

Changes  that  mark  the  Stage. — When  hunting  tribes  cease 
to  depend  for  food  solely  upon  the  killing  or  capture  of  animals;* 
and  acquire  the  art  of  taming  and  breeding  them,  such  tribes- 
are  entering  upon  the  second  great  era  of  economic  progress, 
which  we  have  called  the  pastoral  stage.  Even  in  the  hunt- 
ing stage  there  1^  the  beginnings  of  such  progress,  in  the 
taming  of  dogs  aiS  .horses  for  hunting ;  but  when  extensive 
pasturing  of  animals>£or  food  and  clothing  takes  place,  the 
pastoral  stage  has  welll^un.  Marked  features  of  the  earlier 
stage  still  continue,  however.  Thus,  while  man  now  lives 
chiefly  upon  his  flocks,  he  still  le^^  ^Uqfijcks  to  live  upon 
what  they  csmfind.  So,  whije'^an  n©  iShger  needs  to  wander 
in  search  of  his  own  f8b,di  vh^miist  nevertheless  do  so  for  the 
food  of^.hi^ '^flocks.  Cities  are  therefore  still  impossible. 
Moreliver,  though  the*  land  will  now  support  many  more  in- 
habitants than  before,  much  land  is  still  needed  for  the  neces- 
sary pasture,  and  tribes  and  families  roaming  broadly  in 
search  of  desirable  situations  frequently  come  into  sharp 
collision.  According  to  the  calculations  of  the  celebrated 
geographer.  Professor  Ratzel,  nomadic  populations  require, 
on  an  average,  about  a  square  mile  for  every  two  to  five 
persons.  Wars,  therefore,  continue,  keeping  down  popula- 
tion, but  with  one  important  change:  the  victims  of  war 
for  a  long  time  continue  to  be  generally  slaughtered,  the 
women  and  children  being  more  frequently  spared  than  the 
men ;  but  men  who  have  flocks  t#funjiihrthem  food  cease 
at  length  to  eat  human  flesh.  (S^Juves  later  come  to  be 
recognized  as  of  use  in  serving  their  captors,  and  thus  slav- 
ery succeeds  cannibalism  and  slaughter.     Slavery  could  not 


32     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

have  become  extensive  in  the  earlier  stage,  because  slaves 
without  weapons  would  have  been  of  little  use  when  women 
did  nearly  all  the  drudgery,  and,  on  the  other  hand,  slaves 
with  weapons  would  have  been  a  constant  menace  to  their 
masters. 

Migrations.  —  Wanderings  of  whole  peoples  were  very 
common,  due  in  some  cases  to  the  exhaustion  of  old  feeding- 
grounds,  and  in  other  cases  to  the  natural  increase  in  num- 
bers when  a  tribe  had  been  long  established  in  one  place.  It 
was  such  overpopulation  that  brought  about  the  warlike 
incursions  of  barbarian  hosts  into  Europe  from  the  heart  of 
Asia,  and  the  wanderings  of  the  nations  in  the  early  centuries 
of  the  Christian  era. 

Little  Land  Ownership.  —  It  follows  from  what  we  have 
already  said  that  there  was  little  ownership  of  land  in  the 
sense  in  which  we  now  regard  ownership.  Tribes  as  a  whole 
would  lay  claim  to  certain  districts  for  a  time,  and  would 
try  to  keep  other  tribes  from  pasturing  there.  But  indi- 
viduals of  the  tribe  would  own  no  land,  or  at  most  very 
little.  The  notion  of  land  ownership  develops  only  when  the 
land  itself  becomes  more  useful,  and  when  the  fruits  of  its 
fertility  can  be  more  directly  appropriated  than  could  happen 
when  land  was  used  for  pasturing. 

Private  Property.  —  Yet  private  property  in  other  things 
than  land  had  now  become  not  uncommon.  Even  consider- 
able accumulations  of  wealth  took  place,  consisting  of  flocks, 
gold,  silver,  finely  woven  fabrics,  and  precious  stones,  —  in 
short,  such  things  as  very  early  appeal  to  the  barbarian  taste 
for  showy  ornament  and  can  be  transported  from  place  to 
place  with  relative  ease.  We  also  find,  even  at  this  early 
time,  great  differences  in  the  wealth  of  individuals,  the  rich 
and  the  poor  being  sharply  contrasted. 

Little  Commerce.  —  In  spite  of  the  growth  of  wealth  among 


EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT     33 

men,  there  was  little  exchange  or  commerce.  The  reason 
for  this  is  not  far  to  seek.  In  order  to  have  commerce,  not 
only  must  there  be  wealth,  but  the  wealth  must  be  diversified. 
There  is  little  to  be  gained  by  exchanging  ox  for  ox.  Of 
course,  in  the  other  classes  of  goods  to  which  we  have  referred 
there  was  some  little  traflBc,  but  trade  in  the  modern  sense 
of  the  word  can  hardly  be  said  to  have  existed.  The  economy 
of  each  large  family  or  household  was  in  the  main  sufl&cient 
unto  itself. 

The  Origin  of  Exchange.  —  Such  trade  as  did  obtain  was 
carried  on  by  barter,  or  by  the  still  earlier  form  of  exchanging 
gifts.  It  is  an  interesting  fact  that  barter,  the  earliest 
form  of  regular  exchange,  grew  originally  out  of  the  practice 
of  making  presents.  Among  many  primitive  peoples  to-day, 
barter  is  not  recognized  as  an  institution,  but  when  one  person 
presents  a  gift  to  another,  he  waits  expectantly  for  a  gift 
in  return,  and  when  he  receives  it,  scans  it  closely  to  make  sure 
that  he  has  got  an  equivalent  for  his  generosity. 

III.  The  Agricultural  Stage 

General  Characterization.  —  Man's  next  accomplishment, 
which  carries  him  a  distinct  stage  farther  in  his  development, 
is  of  immense  importance.  Already  knowing  how  to  manage 
animals  to  advantage,  he  now  learns  to  "  manage  "  plants, 
and  to  raise  them  at  will.  Agriculture,  as  a  means  of  sup- 
port, is  thus  added  to  the  keeping  of  flocks  and  to  the  chase. 
A  greater  variety  of  food  is  in  this  way  made  possible  for 
man,  who  now  ceases  his  wandering  life.  A  much  denser 
^population  is  the  result.  Professor  Ratzel's  calculations 
indicate  that  the  early  agricultural  populations  were  about 
six  times  as  dense  as  the  pastoral  populations.  With  a 
denser  population  remaining  permanently  in  fixed  abodes, 


34       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

new  relations  spring  up  among  men,  new  duties,  new  arts, 
and  new  possibilities  of  civilization.  It  is  in  these  conditions 
that  the  political  whole  which  we  know  as  a  nation  has  its 
beginning. 

Land  Ownership.  —  With  growing  density  of  population 
and  increasing  permanency  of  settlement  goes  a  third  result, 
—  the  private  ownership  of  land.  Successful  cultivation  of 
the  soil  requires  detailed  personal  care  and  attention,  and 
some  sort  of  division  of  the  land  was  hence  seen  to  be  neces- 
sary. 

The  Origin  of  a  Laboring  Class.  —  Perhaps  the  most  im- 
portant result  of  the  change  which  produced  the  agricultural 
stage  was  the  growth  of  slavery  as  an  institution.  As  we 
have  said,  slavery  had  its  beginnings  in  the  preceding  period, 
but  it  is  only  in  the  agricultural  stage  that  it  becomes  an 
important,  almost  a  fundamental,  economic  institution. 
Tending  the  herds  did  not  call  for  persistent  labor,  but  the 
process  of  tilling  the  soil  is  undisguised  work,  and  primitive 
men  were  not  fond  of  work,  nor  had  they  been  trained  by  long 
usage  to  submit  to  it  as  to  an  unpleasant  habit.  It  is  not 
strange,  then,  that  they  should  have  spared  the  lives  of  men 
conquered  in  battle  with  the  design  of  putting  upon  them  the 
task  of  tilling  the  soil.  This  seems  to  us  perhaps  a  poor 
reason  for  being  humane,  but  where  humanity  is  the  result, 
a  poor  reason  is  better  than  none.  Free  labor  has  become 
possible  only  because  for  century  after  century  certain  men 
labored  not  from  choice  but  from  necessity.  As  they  became 
free,  labor  became  free,  and  the  habit  of  labor  has  become 
fixed  in  the  race. 

Commerce.  —  With  every  increase  of  wealth  the  tendency 
to  trade  also  increases,  but  as  yet  the  occasion  for  trade  was 
slight,  since  men's  wants  and  wealth  were  still  everywhere 
much  the  same.    Such  trade  as  existed  ministered  chiefly 


EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT     35 

to  the  love  of  luxjry,  and  this  long  continued  to  be  the  case. 
It  was  probably  in  part  from  this  cause  that  the  ancient 
philosophers  and  the  early  fathers  of  the  Christian  Church 
displayed  great  hostility  to  commerce. 

Laws  and  Customs  reflecting  Ideas.  —  There  remains  to 
be  noted  the  change  and  enlargement  in  men's  ideas,  as  re- 
flected in  their  laws  and  customs.  The  Mosaic  code, 
framed  to  govern  a  people  in  the  pastoral  and  agricultiu-al 
stages,  furnishes  perhaps  the  best  source  of  information  on 
these  new  ideas.  Even  before  this  time  there  had  been 
numerous  customs  regulating  life,  but  in  the  Mosaic  code 
we  are  struck  by  the  great  increase  of  duties  and  restrictions 
which  were  then  recognized.  With  fixed  residence  had 
arisen  the  state,  with  its  justice,  its  guidance,  and  its  pro- 
tection, —  its  many  thou  shalts  and  thou  shalt  nots;  and  all 
this  because  men  had  now  come  to  be  permanent  neighbors, 
and  therefore  had  the  utmost  need  of  a  definite  understand- 
ing to  keep  them  from  trespassing  voluntarily  and  invol- 
untarily on  one  another's  liberty.  If  men  are  to  live  close 
together  and  accumulate  property  and  enjoy  it  in  peace, 
there  must  always  be  general  agreement  among  the  many, 
and  vigorous  compulsion  for  the  few. 

"  Neighbor  "  and  "  Stranger."  —  It  is  worthy  of  notice, 
however,  that  for  a  long  time  duties  and  laws  were  chiefly 
recognized  as  being  applicable  only  at  home.  Beyond  the 
boundaries  of  the  tribe  or  nation  they  were  scarcely  held  to  be 
binding  at  all.  Thus,  for  instance,  in  the  early  Germanic 
communities,  when  the  scattered  tribes  were  still  small  and 
separated  by  unoccupied  land,  the  members  of  each  tribe 
lived  in  relations  of  brotherhood,  holding  property  in  com- 
mon and  closely  guarding  all  mutual  rights.  But  when 
different  tribes  came  together  to  trade  on  the  neutral  ground 
separating  their  settlements,  all  kinds  of  sharp  practice  were 


36       ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

deemed  admissible.     Things  not  to  be  thought  of  at  home 
here  passed  unquestioned. 

Duration  of  the  Agricultural  Stage.  —  The  agricultural 
stage  lasted  for  centuries  among  many  peoples.  In  the 
development  of  the  civilization  of  Western  Europe,  it  did  not 
evolve  into  a  higher  form  until  the  great  movement  toward 
the  building  of  cities  began.  Of  course  it  has  not  been  wholly 
displaced  by  subsequent  stages  of  economic  life,  but  only 
modified  —  unceasingly  modified  —  with  the  lapse  of  time. 
The  marks  of  the  earlier  stage  are  clearly  discernible  even 
in  our  industrial  life  in  America. 

IV.   The  Handicraft  Stage 

General  Characterization.  —  We  have  said  on  an  earlier 
page  that  real  material  civilization  begins  with  making 
things ;  it  is  with  the  stages  in  which  men  make  things  that 
we  have  now  to  deal.  Speaking  very  generally,  we  may  say 
that  men  make  things  in  either  of  two  ways :  by  the  hands 
directly,  sometimes  assisted  by  simple  tools;  or  by  the  hands 
indirectly,  through  the  mediation  of  machinery,  generally 
propelled  by  other  than  man's  power.  As  was  natural,  man 
in  his  progress  came  first  to  make  things  with  his  hands 
directly,  learning  later  to  quicken  and  improve  his  work  by 
the  use  of  machinery  and  the  employment  of  power  produced 
by  animals,  or  running  water,  or  wind,  or  steam,  or  elec- 
tricity, or  gas  explosion.  The  very  word  "  manufacture," 
which  we  use  to  represent  the  idea  of  making  things,  meant, 
until  the  nineteenth  century,  making  things  by  hand,  as  the 
Latin  words  from  which  it  is  formed  indicate.  As  the  word 
has  since  had  an  extension  of  meaning,  we  may  say  that 
there  are  two  kinds  of  manufacture :  (1)  hand  manufacture, 
and  (2)  power  manufacture.  Hand  manufacture  is  the 
foundation  of  the  fourth  stage. 


EARLY  STAGES   OF   INDUSTRIAL   DEVELOPMENT     37 

It  goes  withoit  saying  that  labor  and  capital  —  the  fruit 
of  past  labor  used  for  increasing  the  product  of  the  labor  of 
the  day  • —  now  become  more  important  than  ever  before. 
Man  by  his  skill  transforms  raw  materials:  he  learns  to 
weave  fabrics  and  to  fashion  things  in  wood  and  metal ;  to 
use  inanimate,  as  well  as  animate,  nature.  The  chief 
results  of  this  will  be  more  clearly  seen  as  we  discuss  them 
under  separate  headings. 

1.  -Trades.  —  Skill  in  doing  comes  from  repeated  doing. 
"  The  Jack  of  all  trades  is  master  of  none."  With  the  coming 
of  handicrafts,  therefore,  self-interest  leads  men  to  specialize 
so  far  as  the  needs  and  circumstances  of  the  time  will  permit 
them  to  act  thus  with  profit.  Hence,  in  this  stage,  we  find 
division  of  occupations,  whereby  some  men  become  black- 
smiths, some  shoemakers,  some  weavers,  etc.  Many  sur- 
names, such  as  Smith,  Baker,  Joyner,  Taylor,  point  back  to 
a  time  when  such  specialization  was  more  noticed  than  at 
present. 

2.  Commerce.  —  We  have  more  than  once  mentioned  the 
fact  that  there  can  be  little  commerce  so  long  as  men  are 
generally  engaged  in  the  same  kind  of  business.  But  when 
communities  become  larger;  when  their  wants  grow  more 
various  and  their  goods  consequently  increase  in  quantity 
and  diversity ;  when,  finally,  it  becomes  possible  for  men  to 
specialize  in  their  occupations,  commerce  becomes  wide- 
spread and  important.  When  each  man  has  his  trade  and 
makes  articles  of  only  one  kind,  he  will  neither  want  all  the 
things  that  he  makes,  nor  make  all  the  things  that  he  wants. 
He  must  make  exchanges.  And  so,  whenever  manufacture 
develops,  we  find  trade  growing  up  as  a  necessity.  We 
cannot  say  that  manufacture  results  in  commerce,  nor  that 
commerce  results  in  manufacture.  We  must  rather  look 
upon  the  two  as  mutually  causing  each  other,  their  joint 


38  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

cause  lying  in  the  growing  culture  and  wants  of  mankind. 
This  stage,  on  account  of  the  appearance  of  commerce,  is  fre- 
quently designated  as  the  trades  and  commerce  stage,  but  it 
may  also  be  designated  more  simply  as  the  handicraft  stage, 
inasmuch  as  it  is  dominated  by  handicrafts,  while  commerce 
has  in  this  stage  far  less  significance  than  in  modern  times. 

With  the  growth  of  commerce,  some  men  find  it  profitable 
to  spend  all  their  time  in  exchanging  the  goods  that  other 
men  make,  earning  their  compensation  by  saving  the  makers 
the  greater  time  and  trouble  which  direct  exchanges  would 
necessarily  involve.  Moreover,  different  countries  also  find 
an  advantage  in  exchanging  their  respective  products,  and 
here  again  men  of  special  training  are  needed  to  carry  on  the 
work  of  exchange.  Such  commerce  as  grows  up  during  this 
stage  between  different  countries  or  communities  is  much 
handicapped  by  the  inadequate  means  of  communication; 
but  where  goods  can  be  carried  by  water,  commerce,  even  in 
bulky  commodities,  takes  on  considerable  proportions. 

3.  Money.  —  Of  course,  for  such  a  general  system  of  ex- 
change, barter  was  entirely  inadequate.  Among  primitive 
peoples  barter  is  the  only  mode  of  effecting  exchanges,  and 
travelers  among  savage  tribes  tell  amusing  stories  of  the 
difficulties  experienced  in  securing  goods  by  such  a  system. 
We  cannot  here  enter  into  a  full  discussion  of  the  limitations 
of  barter,  but  we  may  speak  of  one  of  the  chief  requisites 
for  any  exchange  by  barter,  —  the  need  of  what  one  writer 
has  called  reciprocity  of  desire.  By  this  expression  it  is 
meant  that  before  an  exchange  can  take  place  by  barter, 
the  man  who  has  a  superfluity  of  one  good  and  wants  another 
must  find  a  second  person  whose  superfluity  and  want  are 
reciprocal  to  his  own.  The  rarity  of  such  coincidence  is  it- 
self sufficient  to  prevent  barter  from  serving  as  an  efficient 
method  of  exchange.    In  the  course  of  time,  as  men  bartered 


EARLY  STAGES  OF   INDUSTRIAL   DEVELOPMENT     39 

with  one  another,  it  was  found  that  certain  things  were  more 
generally  acceptable  than  others,  and  that  some  one  thing 
or  some  few  things  were  most  generally  acceptable.  These 
generally  acceptable  goods  have  varied  in  different  stages  of 
economic  development  and  in  different  places.  Among 
primitive  peoples,  articles  of  adornment  have  usually  held 
such  a  place.  As  people  grew  to  learn  that  such  articles 
were  generally  acceptable,  they  would  themselves  in  turn  re- 
ceive them  more  and  more  readily  in  their  exchanges,  and  the 
frequency  of  use  would  in  turn  increase  the  recognized  utility 
of  possessing  them.  Without  going  further  with  our  ex- 
planation, we  may  say  that,  spontaneously  and  in  large  part 
by  unconscious  processes,  there  has  always  grown  up  among 
every  people  some  one  generally  accepted  and  recognized  medium 
of  exchange  or  some  few  things  that  have  been  so  recognized. 
As  this  medium  grew  in  acceptability  and  cognizability ,  it 
took  on  more  and  more  the  character  of  what  we  know  as  money. 
It  was  during  the  handicraft  or  trades  and  commerce  stage 
that  gold  and  silver,  already  much  used  for  this  purpose, 
came  to  have  that  universal  recognition  for  their  desirability 
in  exchanges  that  made  them  money. 
.4.  Cities.  —  Among  those  employed  in  agricultural  pur- 
suits, there  is  a  tendency  to  form  village  communities,  but 
in  the  agricultural  stage  such  communities  cannot  become 
populous,  because  agriculture  requires  a  scattered  popula- 
tion. Manufacture,  on  the  other  hand,  has  an  opposite 
tendency.  If  men  are  to  live  by  their  trades  and  by  ex- 
changing with  one  another,  it  is  important  that  they  be 
near  one  another.  Thus  cities,  situated  conveniently  for 
commerce  on  the  coast  or  on  great  rivers,  develop  whenever 
men  learn  to  manufacture. 

5.    The  Gild  System.  —  New  forces  coming  into  society  do 
not  take  care  of  themselves.    So  the  trades  had  to  organize 


40  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

in  order  to  reduce  their  business  to  some  kind  of  order.  Each 
trade  had  its  gild,  which  specified  in  detail  how  the  business 
should  be  carried  on,  how  many  should  be  admitted  to  it, 
and  how  the  trade  should  be  learned.  Where,  as  was  usual, 
the  gilds  controlled  the  government  of  the  cities,  these  rules 
were  also  sanctioned  by  law. 

6.  Political  Freedom.  —  Throughout  most  of  Europe  the 
agricultural  stage  culminated  in  the  feudal  system.  Under 
that  system  the  feudal  lord  occupied  a  commanding  position, 
very  like  that  held  by  a  patriarch  in  an  earlier  pastoral 
state,  and  owned  the  land  occupied  by  the  tribe  or  people. 
The  tillers  of  the  soil  had  become  serfs,  who,  though  they 
could  not  be  sold  away  from  the  land,  were  obliged  to  stay 
on  the  lord^s  domain  and  work  for  him  for  such  reward  as 
he  chose  to  give  them,  or  such  as  custom  and  public  opinion, 
powerfully  backed  up  by  the  Church,  had  established. 
Slavery  thus  gave  way  to  serfdom.  The  trading  cities  some- 
times became  opponents  of  the  great  feudal  estates.  The 
lords,  feeling  their  power  threatened,  sometimes  opposed 
the  cities.  And  so  there  were  quarrels  and  agreements  in 
places.  Finally  the  cities  conquered  and  won  charters  for 
themselves.  These  cities  were  then  free  cities,  and  serfs 
who  fled  to  them  were  accepted  and  made  free.  Thus 
feudalism  began  to  break  down  in  the  towns  at  least,  and 
with  the  disappearance  of  slavery  and  serfdom,  man's  prog- 
ress in  the  art  of  getting  a  living  resulted  in  another  great 
step  toward  liberty  and  humanity. 

SUMMARY 

1.  Uncivilized  or  savage  man  gets  his  living  by  finding  things, 

i.e.  by  bunting  or  fishing,  or  by  both. 

2.  Economic  activity  in  the  earliest  stage  is  largely  isolated. 

3.  Hunting  tribes  differ  in  character  from  fishing  tribes,  owing 

to  the  diflference  in  the  conditions  of  their  life. 


EARLY  STAGES   OF  INDUSTRIAL   DEVELOPMENT     41 

4.  The  domestication  of  animals,  leading  to  the  pastoral  stage, 

assures  subsistence,  introduces  slavery,  and  increases  wealth. 

5.  The  pastoral  stage,  in  which  men  get  their  living  by  "raising" 

or  "managing"  animals,  has  little  landownership  or  com- 
merce, and  is  marked  by  frequent  tribal  migrations. 

6.  In  the  agricultural  stage,  man  adds  the  "management"  of  plant 

life  to  his  earher  management  of  animal  life,  thus  making 
his  existence  more  secure  and  population  more  dense. 

7.  Cultivation  of  the  soU  fixes  residence,  extends  law  and  custom, 

and  develops  tribal  ownership  of  land  and  a  distinct  laboring 
class. 

8.  Economic  civilization,  which  begins  with  the  making  of  things, 

appears  in  the  handicraft  stage,  called  also  the  trades  and 
commerce  stage. 

9.  In  the  handicraft  stage,  money  is  regularly  used,  trades  are 

developed  and  organized  in  gilds,  and  cities,  rising  from  the 
new  commerce,  become  free  and  break  down  the  feudal 
system. 

QUESTIONS  FOR  RECITATION 

1.  What  is  the  economic  mark  of  savagery?     How  do  bunting  and 

fishing  tribes  differ  ?     Why  ? 

2.  What  is  the  economic  mark  of  semi-civilization?     What  stages 

have  this  as  their  special  character?      ' 

3.  What  other  economic  changes  from  the  earlier  stage  are  found 

in  the  pastoral  stage? 

4.  What  is  the  fundamental  difference  between  the  agricultural 

stage  and  the  pastoral?  What  economic  results  flow  from 
this  difference? 

5.  What  is  the  economic  mark  of  civilization?     What  stages  have 

this  special  character? 

6.  What  is  the  relation  between  trades  and  commerce? 

7.  What  great  economic  institutions  grew  out  of  trades  and  com- 

merce ? 

QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  How  did  man  acquire  the  art  of  domesticating  animals?  of 

controlling  plant  life? 

2.  Has  free  labor  an  economic  advantage  over  slavery?     Has  it 

always  had  such  an  advantage? 

3.  Has  free  labor  a  moral  superiority  over  slavery  ?     Has  it  always 

had  such  superiority? 


^  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

4.  If  history  discloses  the  fact  that  economic  changes  have  brought 
about  changes  in  men's  ideas  of  right  and  wrong,  are  further 
obanges  of  the  same  sort  to  be  expected? 

LITERATURE 

See  references  at  close  of  preceding  chapter.    Also : 

Ashley,   W.   J. :     Introduction   to   English   Economic   History   and 

Theory,  Ch.  I,  §  6. 
Bucher,  C. :   Industrial  Evolution,  p.  154. 
Cunningham,  W. :    The  Growth  of  English  Industry  and  Commerce, 

Ch.  IV,  §  114. 
Ely,  R.  T. :   Studies  in  the  Evolution  oj  Industrial  Society,  Chs.  Ill 

to  V. 
Gamble,  F.  W. :    The  Animal  World. 
Genesis,  Ch.  XIII. 

Maine,  Sir  Henry :  Early  Law  and  Custom,  Ch.  VIII. 
Rogers,  J.  E.  Thorold :   Work  and  Wages,  Ch.  Ill,  pp.  55-66. 
Scott,  D.  H. :   The  Evolution  of  PlarUs. 


CHAPTER  III 
THE  INDUSTRIAL   STAGE 

We  come  now  to  the  last  of  the  stages  in  man's  economic 
development.  Inasmuch  as  this  last  stage  is  the  one  in  which 
we  are  living,  it  will  be  well  to  give  to  it  a  more  detailed 
study  than  has  been  given  to  the  preceding  stages.  After  a 
general  description  of  the  characteristic  differences  between 
the  industrial  stage  and  the  stage  which  preceded  it,  we  shall 
pass  on  to  study  the  history  of  the  great  movement  by 
which  the  industrial  stage  was  ushered  in.  As  it  was  in 
England  that  the  movement  began,  and  as  it  is  in  the  United 
States  that  the  movement  has  perhaps  proceeded  to  the 
greatest  extreme,  we  shall  consider  the  history  of  the 
movement  with  reference  to  these  two  countries. 

A  closer  study  of  the  period  than  we  shall  be  able  to 
devote  to  it  would  disclose  the  fact  that  the  industrial  stage 
has  up  to  the  present  shown  three  distinct  phases.  The 
distinguishing  characteristic  of  the  earliest  phase  —  say 
from  1760  to  1830  —  was  the  development  of  machine  in- 
dustry and  the  application  to  it  of  steam  power.  From  about 
1830  to  about  1870  the  distinguishing  characteristic  of  in- 
dustry was  the  development  of  steam-power  transportation. 
From  the  latter  date  to  the  present  the  most  striking  fact 
has  been  concentration  and  integration  in  industry  under  a 
rapidly  spreading  corporate  organization.  The  word  con- 
centration describes  a  tendency  toward  the  production  of 
increasing  amounts  or  proportions  of  any  product  by  single 

43 


44         ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

business  units ;  while  the  word  integration  describes  a  tend- 
ency towards  the  production  by  single  business  units  of 
an  increasing  niunber  of  commodities,  usually  closely  allied. 
To  study  these  minor  periods  in  detail  would  require  greater 
space  than  can  be  given  to  the  subject  in  a  book  of  this  sort ; 
but  in  our  study  of  conditions  in  the  United  States  at  various 
points  in  the  text  we  shall  have  occasion  to  throw  further 
light  upon  them. 

General  Characterization.  —  As  we  have  said,  men  may 
manufacture  by  hand  or  by  power.  It  was  a  great  step 
forward  when  man  learned  to  manufacture  at  all ;  it  was  a 
transformation  of  society  when  man  learned  to  manufacture 
by  power.  Mere  human  muscle  is  an  insignificant  force  as 
compared  with  the  external  forces  of  nature,  and  man's 
greatest  accomplishments  when  he  depends  upon  his  own 
unaided  efforts  are  relatively  unimportant.  But  man  has 
more  brains  than  any  other  creature,  and  progresses  by  their 
use. 

It  is  hardly  necessary  to  state  to  the  student  that  the  in- 
dustrial stage  began  with  the  inventions  and  discoveries 
that  resulted  in  the  steam  engine.  The  date  usually  asso- 
ciated with  this  important  change  is  1769.  Here,  as  in  the 
preceding  chapter,  it  will  conduce  to  clearness  if  we  analyze 
the  situation  and  show  the  characteristic  contrasts  between 
the  industrial  stage  and  the  former  stage  of  economic  develop- 
ment. 

1.  Relations  between  Classes.  —  Under  the  old  system  of 
hand  manufacture,  each  master  in  a  trade  typically  worked 
by  himself  or  with  a  few  others,  apprentices  or  journeymen, 
who  in  time  would  normally  become  masters  themselves. 
Hence  we  may  say  that  men  in  the  full  possession  of  their 
trade  worked  on  their  own  account  and  owned  what  they  made 
as  well  as  the  means  of  manufacture.    When  prices  rose,  the 


THE   INDUSTRIAL  STAGE  45 

benefit  went  to  them.  Strictly  speaking,  there  were  no 
class  divisions  in  manufacture,  an  apprentice  or  a  journey- 
man being  simply  a  master  "  in  the  making,"  living  on  terms 
of  intimacy  in  the  master's  family,  and  in  many  cases  marry- 
ing the  daughter  of  the  master  and  later  succeeding  to  the 
business. 

Rise  of  Factories.  —  But  it  is  manifestly  impossible  for 
every  workman  to  own  an  engine  and  elaborate  manufactur- 
ing machinery.  The  result  of  the  application  of  steam  to 
manufacturing,  therefore,  was  that  a  few  men,  more  enter- 
prising or  wealthier  than  the  rest,  made  the  experiment, 
bought  high-priced  machinery,  employed  workmen,  and 
quickly  distanced  their  conservative  competitors  who  re- 
sisted the  change.  Under  these  conditions,  as  we  can  now 
see,  the  factory  system  was  bound  to  grow  and  to  supplant 
the  old  system  of  house  industry.  Those  who  resisted  had 
to  go  to  the  wall.  They  did  not  enjoy  the  process  nor  were 
they  patient  under  its  operation;  but  at  length,  their 
fortunes  wasted,  their  business  ruined,  their  hope  of  successful 
resistance  gone,  they  yielded  and  sullenly  sought  places  as 
workmen  in  the  new  factories. 

Before  this  great  industrial  change,  employer  and  employed 
were  not,  as  we  have  said,  sharply  or  permanently  divided  by 
class  distinctions.  Living  and  working  together,  apprentice 
and  master  had  that  mutual  respect,  which  came  from  the 
remembrance  of  his  own  apprenticeship  on  the  part  of  the 
master,  and  the  hope  of  a  future  position  of  independence  in 
the  breast  of  the  apprentice.  Now  we  have  two  distinct 
industrial  classes,  with  interests  that  seem  irreconcilable, 
and  between  them  is  a  great  gulf,  which  in  an  old  society 
comparatively  few  men  can  hope  to  cross. 
•  2.  The  Wages  System.  —  Formerly  the  workman  had  what 
he  made  and  sold  it  for  what  he  could  get.     This  was  natural 


46       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

under  a  system  of  divided  labor  in  which  each  man  made  one 
article  and  that  a  whole  article.  But  in  the  more  eflBcient 
processes  of  production  that  obtain  to-day,  there  is  necessary 
a  much  greater  division  of  labor,  or  rather  combination  of 
labor.  Now,  it  requires  many  men  working  together  to 
make  a  single  article  efficiently.  But  when  a  group  of  men 
have  made  a  case  of  shoes,  of  which  one  has  cut  out  the  soles, 
another  has  made  the  heels,  etc.,  who  can  say  how  many 
shoes  the  individual  workman  has  made?  Then,  too,  the 
employer  has  furnished  the  materials  and  machinery  and  has 
assumed  the  risk  of  loss.  He  must  be  paid.  How  many 
shoes  shall  be  his  portion  of  the  whole  ?  Some  way  out  of 
the  trouble  must  be  found !  As  a  matter  of  fact  the  way 
adopted  was  the  simplest  one  and  perhaps  the  best.  The 
employer  takes  all  the  shoes,  and  gives  the  workmen  for 
their  labor,  not  the  actual  product  of  their  labor,  but  a 
stipulated  wage  which  is  represented  to  be  an  equivalent. 
And  thus  has  grown  up  the  modern  "  wages  system  "  of 
employing  labor. 

3.  Competition.  —  Under  the  old  gild  system  of  manu- 
facturing for  purely  local  markets,  prices,  as  well  as  many 
other  elements  of  industry,  were  largely  regulated  by  custom 
or  by  law.  The  man  trying  to  undersell  his  neighbor  would 
have  been  an  object  of  public  contempt  and  hatred.  Men 
sometimes  entered  into  rivalry  or  competition  to  see  who 
could  make  goods  of  the  best  quality,  but  even  here  custom 
and  law  sometimes  entered  to  reduce  all  to  a  dead  level  by 
determining  what  the  quality  of  the  commodity  should  be. 

But  with  the  growth  of  great  markets  in  the  industrial 
stage  all  this  was  changed.  Factories  competed  not  for  the 
trade  of  a  single  city  or  county,  but  for  that  of  a  whole 
country  or  of  the  world.  The  producers  were  no  longer 
neighbors  living  in  close  and  friendly  intercourse,  but  great 


THE  INDUSTRIAL  STAGE  47 

hostile  businesses,  often  situated  in  different  parts  of  the 
country.  The  handicraft  stage  had  been  prevailingly  a 
period  of  "  town  economy  " ;  the  industrial  stage  was  a 
period  of  "  national  economy/*  which  in  our  own  time  has 
developed  into  something  very  like  a  "  world  economy." 
Under  such  conditions,  competition  once  begun  must  grow 
ever  fiercer  and  fiercer.  It  was  not  a  competition  in  well- 
doing but  in  money-making. 

The  struggle  had  its  good  results.  It  was  what  men 
needed  to  stimulate  their  energy  and  enterprise.  Invention 
followed  invention;  business  rapidly  centered  in  places 
where  it  could  be  carried  on  at  the  greatest  advantage ;  labor 
processes  were  divided  and  subdivided  as  the  increase  of 
machinery  and  the  growth  of  markets  rendered  division 
profitable,  and  by  these  and  other  means  the  cost  of  produc- 
tion was  constantly  lowered. 

Thinkers  of  the  time  not  unnaturally  were  profoundly 
impressed  by  the  rapid  increase  of  wealth  due  to  competi- 
tion—  or  rather  to  freedom  of  industry  —  as  well  as  by 
the  irksomeness  of  the  old  gild  restrictions,  to  which  appeals 
were  being  made  by  those  who  wished  to  curb  the  new  move- 
ment. These  thinkers  overlooked  the  evils  of  unrestricted 
freedom,  and  in  consideration  of  its  benefits  concluded  that 
the  state  should  not  try  to  guide  industry,  as  it  had  so  long 
been  doing,  but  that  industry  needed  only  to  be  left  alone  to 
achieve  its  grandest  results.  It  will  be  necessary  later  to 
note  some  of  the  results  of  the  attempts  of  the  government 
to  follow  this  principle. 

4.  Banking  and  Credit.  —  All  great  movements  are  com- 
plex, the  various  parts  being  mutually  cause  and  effect,  one 
of  another.  The  preceding  stage  had  developed  money; 
the  industrial  stage  has  developed  credit.  Credit  has  been 
in  part  the  result,  as  it  has  been  in  part  a  cause,  of  the  other 


48       ELEMENTARY   PRINCIPLES  OP  ECONOMICS 

great  changes  that  characterize  the  age.  ]Money  is  still 
used  as  the  most  common  medimn  of  exchange  in  retail 
trade  and  in  small  transactions  generally,  but  in  large  trans- 
actions it  has  been  displaced  in  great  measure  by  the  various 
instruments  of  credit,  such  as  checks,  drafts,  and  bills  of 
exchange.  Moreover,  to  secure  a  proper  organization  of 
credit,  it  has  been  necessary  for  society  to  develop  the  system 
of  banking  as  we  know  it  to-day.  Thus  one  great  improve- 
ment produces  others  and  is  in  turn  produced  by  them.  In 
1782  there  was  but  one  bank  in  the  United  States ;  in  July, 
1914,  there  were  7578  national  banks ;  14,512  state  banks ;- 
1064  private  banks;  and  1564  loan  and  trust  companies,-*- 
an  aggregate  of  24,718  institutions  that  were  engaged  largely 
or  wholly  in  commercial  banking. 

5.  Transportation.  —  Before  the  beginning  of  the  indus- 
trial stage,  the  problem  of  mo\ing  things  was  far  less  impor- 
tant than  it  has  since  become.  Not  much  could  be  moved 
long  distances  by  land  while  only  packhorses  and  wagons 
were  used.  Often,  too,  the  roads  were  such  as  prevented 
the  best  results  even  from  such  a  mode  of  locomotion. 
Transportation  by  land  being  so  difficult,  commerce  de- 
pended then,  as  always  before,  chiefly  upon  water.  Sailing 
vessels,  though  slow,  could  carry  even  bulky  commodities 
between  places  connected  by  water,  and  large  cities  were 
therefore  always  on  the  water,  most  frequently  on  the  sea 
but  sometimes  on  lakes  and  rivers.  We  have  become  more 
independent  of  waterways  furnished  by  nature  or  by  art. 
Imp>ortant  cities  can  now  grow  up  miles  away  from  navigable 
rivers  or  the  seacoast,  though  the  importance  of  water 
conmiunication  even  to-day  is  attested  by  the  slight  pro- 
p)ortion  of  cities  that  are  so  situated.  In  all  this  we  see 
that  civilization  is  marked  by  man's  increasing  domination 
of  nature. 


THE   INDUSTRIAL  STAGE  49 

6.  Moral  and  Legal  Restraints.  —  Always  in  past  stages 
of  economic  development,  we  have  seen  a  sharp  distinction 
drawn  between  neighbors  and  strangers.  The  family  and 
neighbors  have  formed  a  constantly  widening  circle,  and 
have  always  been  protected  by  detailed  law  and  custom; 
strangers,  on  the  other  hand,  were  exposed  to  whatever  treat- 
ment might  be  considered  advantageous.  Indeed,  the 
word  "stranger"  in  many  languages  even  had  the  added 
meaning  of  enemy.  It  is  characteristic  of  the  industrial 
stage  that  the  distinction  between  neighbor  and  stranger 
is  no  longer  a  clearly  defined  one.  It  may  be  asked,  Have 
all  men,  then,  become  brothers,  or  have  they  all  become 
strangers  and  enemies?  Few  will  claim  that  men  in  their 
business  dealings  are  brotherly.  Yet  if  we  look  at  the  whole 
of  the  industrial  stage,  we  shall  find  reasons  for  believing 
that  the  change  which  has  been  taking  place  has  been  to 
make  neighbors  of  those  who  were  strangers  and  enemies. 
The  great  and  sudden  widening  of  the  circle  of  neighbors  was 
naturally  accompanied  by  a  weakening  of  the  feeling  of  neigh- 
borliness.  But  in  our  own  time  more  than  ever  before  there 
has  been  a  conscious  effort  to  strengthen  this  feeling  of 
neighborliness  or  brotherhood,  and  to  widen  the  circle  even 
beyond  national  lines.  In  the  face  of  the  horror  of  a  great 
European  war,  men  are  still  coming  more  and  more  to  see 
that  "  above  all  nations  is  humanity." 

SUMMARY 

1.  The  industrial  stage  has  ab-eady  passed  through  three  phases; 

2.  In  the  industrial  stage  men  make  things  by  machinery  operated 

by  power. 

3.  The  older  intimacy  of  industrial  classes  gives  place  to  a  sharp 

and  wide  separation  between  employers  and  employees. 

4.  Domestic  industry  gives  place  to  the  factory  system. 

5.  The  worker  now  sells  nothing  but  his  labor,  under  what  is 

known  as  the  wages  system. 


50  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

6.  Competition  on  an  ever-widening  scale  replaces  the  force  of 

custom. 

7.  Credit  and  banking  rapidly  develop,  both  as  cause  and  effect 

of  the  increased  production  of  goods. 

8.  The  increase  in  the  complexity  of  economic  conditions  and  re- 

lations has  necessitated  new  legal  and  moral  restraints  and 
a  great  widening  of  the  circle  of  neighbors  ^ 

QUESTIONS  FOR  RECITATION 

1.  Characterize  the  three  phases  of  the  industrial  stage,  and  give 

approximate  dates. 

2.  Name  the  different  kinds  of  power  used  to  run  modem  machinery. 

3.  Distinguish  factory  industry  from  domestic  industry. 

4.  What  is  the  wages  system  and  how  did  it  develop  ? 

5.  How  did  the  widening  of  markets  sharpen  competition? 

6.  Explain  the  relation  of  credit  and  transportation  to  the  other 

characteristic  features  of  the  industrial  stage. 

7.  Are  men  more  or  less  brotherly  in  our  day  than  in  earlier  stages 

of  history  ? 

QUESTIONS  FOR  STUDY  AND   DISCUSSION 

1.  Can  you  think  of  other  economic  differences  than  those  men- 

tioned in  the  text  that  distinguish  the  industrial  stage  from 
earlier  stages? 

2.  Can  you  think  of  other  important  characteristics  of  the  latest 

phase  of  the  industrial  stage? 

3.  What  are  some  of  the  ways  in  which  the  industrial  revolution 

has  changed  the  character  of  war? 

4.  Name  some  of  the  international  movements  and  institutions  of 

our  time  that  are  both  causes  and  results  of  a  growing  world 
economy. 

5.  Have  modem  changes  in  industrial  forms  and  methods  any 

connection  with  pohtical  democracy?  with  education?  with 
the  question  of  woman  suffrage? 

6.  Has  the  increasing  monopoly  of  our  time  been  a  result  of  com- 

petition? 

LITERATURE 

Ely,  R.  T. :    The  Evolution  of  IndustHal  Society,  Pt.  II,  Ch.  VII. 
Hobson,  J.  A. :   The  Evolution  of  Modern  Capitalism,  Chs.  II  and  IV. 
Toynbee,  Arnold:    The  Industrial  Revolution,  Ch.  IV,  pp.  46-^57. 
Webb,  Beatrice  (Potter) :   The  Ca^e  for  the  Factory  Acts. 


CHAPTER  IV 
THE  INDUSTRIAL  STAGE  IN  ENGLAND 

It  was  in  England  that  the  change  from  the  handicraft 
stage  to  the  industrial  stage  first  began  and  was  most  rapidly 
accomplished.  The  change  is  generally  called  in  England 
the  Industrial  Revolution,  and  the  name  is  in  many  ways 
appropriate.  A  change  which  takes  place  so  gradually  that 
life  adjusts  itself  to  the  new  conditions  without  great  loss 
or  suffering,  —  a  change  like  that  which  occurs  in  the  plant 
that  is  always  growing,  yet  seems  to  be  at  a  standstill,  — 
such  a  change  we  call  a  development  or  evolution.  But  a 
change  which  comes  so  rapidly  that  life  cannot  promptly 
adjust  itself  to  the  new  conditions,  a  change  that  breaks 
down  the  old  order  with  much  confusion  and  suffering,  — 
this  we  call  a  revolution.  It  would  be  a  mistake,  however, 
to  suppose  that  even  in  England  the  new  system  fell  from  the 
heavens  without  omen  or  hint  of  its  coming.  It  is  impossible 
in  this  small  book  to  discuss  the  point  at  length ;  it  must  be 
sufficient  to  warn  the  student  against  an  exaggerated  idea 
of  the  suddenness  or  violence  of  the  change. 

To  understand  the  English  Industrial  Revolution  aright, 
we  must  first  go  back  to  study  the  condition  of  things  just 
before  it  began. 

Agriculture.  —  First  of  all  it  is  important  to  bear  in  mind 
that  eighteenth-century  England,  though  already  a  leader 
among  industrial  and  commercial  nations,  was  still  pre- 
dominantly agricultural.     During  the  century  the  popula- 

51 


62  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

tion  of  the  nation  grew  from  about  six  million  to  about  nine 
million  inhabitants,  of  whom  probably  more  than  half 
lived  lives  that  depended  directly,  in  whole  or  in  part,  on 
agriculture.  In  the  second  place,  it  should  be  noted  that 
the  revolution  in  agriculture  in  the  eighteenth  century  in  a 
large  measure  preceded  and  conditioned  the  revolution  in 
manufactures.  The  English  people  of  the  eighteenth  cen- 
tury were  earlier  and  more  keenly  aware  of  the  tremendous 
changes  that  were  taking  place  in  the  country  than  of  those 
that  were  revolutionizing  industry.  The  later  social  signifi- 
cance of  the  industrial  revolution  has  so  seized  upon  the 
imagination  of  men  that  we  are  in  danger  of  forgetting  the 
real  magnitude  and  importance  of  the  contemporary  revo- 
lution in  agriculture. 

Space  cannot  be  allowed  here  for  a  complete  and  itemized 
description  of  agricultural  conditions  as  they  were  in  England 
in  the  first  half  of  the  eighteenth  century.  Such  a  description 
would  carry  us  into  a  detailed  and  complicated  technical  and 
historical  study.  It  must  suffice  to  point  out  that  in  the 
form  and  ownership  of  "  farms,"  in  the  breeds  of  farm 
animals,  and  in  the  processes  and  tools  of  farming,  conditions 
were  almost  as  widely  different  from  those  with  which  we 
are  now  familiar  as  are  the  steam  engine  and  aeroplane 
from  the  ox  cart  and  the  stagecoach. 

The  various  breeds  of  live  stock  were  little  advanced  from 
their  primitive  originals.  Such  finer  breeding  of  sheep  as 
had  been  achieved  was  directed  toward  the  production  of 
fine  wool  for  fine  clothing,  with  comparatively  little  regard 
for  the  production  of  food.  As  compared  with  modern  times, 
horses,  hogs,  and  cows  were  very  little  distinguished  from 
the  wild  species  that  are  still  to  be  found  in  some  parts  of 
the  world.  Farm  tools  and  processes  were  hardly  in  ad- 
vance of  those  known  to  the  Hebrew  patriarchs,  as  they  are 


THE   INDUSTRIAL  STAGE   IN  ENGLAND  53 

pictured  for  us  in  the  Old  Testament.  The  plows,  made 
almost  without  metal,  could  turn  only  the  shallowest 
furrow;  hardly  any  other  implements  were  available  for 
"  fitting  "  the  land ;  hay  and  grain  were  still  cut  with  sickle, 
scythe,  or  cradle ;  wagons  were  of  the  simplest  and  rudest ; 
grain  was  threshed  with  the  flail  or  tramped  out  by  slow- 
footed  oxen  upon  the  threshing  floor. 

The  land  was  still  largely  held  under  a  surviving  form  of 
the  age-old  manorial  system,  which  was  superimposed  by 
the  Normans  upon  the  existing  social  order  of  the  Saxons. 
After  the  invasion,  William  the  Conqueror  granted  his  sup- 
porters large  estates  on  condition  of  their  making  certain 
payments  and  rendering  various  services,  military  service 
in  time  of  war  being  especially  prominent.  These  supporters, 
the  lords  of  the  manors,  in  their  turn  granted  portions  of 
their  estates  to  dependents  on  similar  conditions.  Under 
this  military  organization  of  feudalism,  the  English  village 
of  the  Middle  Ages  developed  into  a  little  world  of  its  own, 
its  members  closely  knit  together  into  a  small  self-supporting 
community.  The  center  of  the  village  was  the  lord's  manor 
house,  of  which  the  principal  room  was  the  hall.  This  hall, 
a  familiar  picture  to  all  readers  of  Sir  Walter  Scott's  novels, 
served  as  the  lord's  court  of  justice,  dining  room,  and  general 
living  room  of  his  household.  In  a  large  manor  house 
there  would  also  be  a  kitchen,  a  pantry,  a  sewing  room,  a 
brewery,  a  bakehouse,  a  laundry,  and  a  chapel.  The 
personal  retinue  of  the  lord  was  sometimes  very  large. 
Besides  the  sheriffs,  bailiffs,  and  stewards  who  administered 
his  estate,  there  were  also  squires,  pages,  grooms,  butlers, 
musicians,  and  other  retainers. 

The  demesne,  belonging  exclusively  to  the  lord,  was  some- 
times a  compact  area  of  land  like  a  modern  farm,  immediately 
surrounding  the  manor  house ;  but  generally  it  was  in  large 


64  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

part  dispersed  like  the  land  of  the  lord^s  tenants  in  the 
oommon  fields,  as  described  below.  The  poorer  villagers, 
the  villains  and  serfs,  were  dependent  upon  the  lord  and  cul- 
tivated his  demesne,  giving  him  part  of  their  time  and  keep- 
ing part  for  their  own  work. 

The  chief  portion  of  the  estate  was  called  the  common  or 
open  fields,  and  these  were  cultivated  by  independent 
farmers  and  laborers,  some  of  whom  plied  the  various  trades 
of  the  village ;  they  were  the  millers,  blacksmiths,  barbers, 
cobblers,  tinkers,  etc.  We  generally  hear  of  "  three  fields,  " 
because  the  land  was  divided  into  three  parts,  and  each  field 
was  again  divided  into  a  great  many  small  strips,  so  that  the 
common  fields  had,  as  Cheyney  describes  it,  "  the  appear- 
ance of  a  great  irregular  checkerboard  or  patch- work  quilt." 
The  strips  of  land  were  allotted  to  the  tenant  farmers  and 
other  dependents,  and  each  had  a  right  to  the  produce  of 
his  strips.  However,  he  was  not  free  to  cultivate  them  as  he 
chose,  but  he  had  necessarily  to  follow  the  general  custom 
of  the  village.  The  proper  seasons  for  plowing,  sowing,  and 
harvesting  were  appointed  by  the  reeve.  Generally  the 
three-course  system  of  farming  was  followed,  explaining  the 
division  of  the  land  into  the  three  fields.  The  crops  were 
rotated,  each  field  lying  fallow  every  third  year,  after  bearing 
wheat  or  rye  the  first  year,  and  some  spring  crop,  such  as 
corn,  barley,  oats,  beans,  or  peas,  the  second  year.  Various 
strips  belonging  to  one  farmer  were  accordingly  scattered 
over  the  different  parts  of  the  common  fields.  After  harvest- 
ing, all  the  villagers  were  free  to  graze  their  cattle  over  the 
stubble  of  the  cultivated  or  arable  land. 

The  uncultivated  meadows  formed  a  still  different  part  of 
the  manor,  and  after  the  hay  was  cut  and  gathered,  the  cattle 
of  the  villagers  were  likewise  turned  out  to  graze  on  these 
meadows.    Marshes,  woods,  and  neglected  land  constituted 


THE   INDUSTRIAL  STAGE  IN   ENGLAND  55 

the  waste.  The  cattle,  horses,  sheep,  and  swine  of  the 
village  were  sent  out  to  pasture  on  the  waste  under  the  care 
of  village  herdsmen. 

By  this  description  it  will  be  seen  how  widely  the  English 
village  of  early  times  differed  from  the  collection  of  independ- 
ent farms  which  constitutes  the  modern  agricultural  com- 
munity. 

The  manorial  system  was  naturally  greatly  modified  during 
the  course  of  the  Middle  Ages.  The  serfs  and  the  villains 
gradually  gained  complete  liberty  of  person,  and  we  find  also 
a  class  of  yeoman  farmers,  who  were  independent  landowners, 
working  their  small  farms  largely  with  their  own  hands. 
How  large  this  class  had  been  in  early  times  is  doubtful. 
The  land,  however,  still  continued  to  be  held  in  small  strips. 

Inclosure.  —  Large-scale  operations  and  highly  productive 
farming  were  impossible  under  such  a  confused  system  of 
holdings.  The  old  system  had  accordingly  to  give  place 
to  a  new,  and  "  inclosure  "  was  imperatively  demanded. 
Under  the  old  system,  the  various  classes  who  gained  their 
living  from  the  land  had  formed  what  may  be  called  a  partner- 
ship ;  —  they  had  shares  in  a  "  bundle  of  rights."  Inclosure 
signified  a  putting  together  of  the  scattered  strips  into  in- 
dividual farms  and  an  abolition  of  the  common  rights  of 
pasturage  on  the  open  fields:  in  other  words,  it  meant  a 
dissolution  of  the  old  partnership  of  the  cultivators  of  the 
soil,  and  individual  cultivation  of  farms  held  separately,  — 
just  the  arrangement  which  we  in  the  United  States  take 
as  a  mere  matter  of  course.  In  the  preambles  to  the  In- 
closure Acts  it  is  stated  that 

"  the  open  and  common  fields  lie  dispersed  in  small  pieces 
intermixed  with  each  other,  and  inconveniently  situated; 
that  divers^persons  own  parts  of  them,  and  are  entitled  to 


56  ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

rights  in  common  on  them,  so  that  in  their  present  state  they 
are  incapable  of  improvement,  and  that  it  is  desired  that  they 
may  be  divided  and  inclosed ;  a  specific  share  being  set  out 
and  allowed  to  each  owner." 


As  a  result  of  inclosure,  great  improvements  in  the  general 
organization  of  farming  took  place.  Great  technical  im- 
provements, too,  suitable  to  large-scale  farming,  were  in- 
troduced. "  Norfolk  husbandry,"  with  its  four-course  ro- 
tation, alternating  green  crops  advantageously  with  cereals, 
successful  schemes  of  breeding,  better  draining,  more  efficient 
dressing  with  manures,  and  new  economical  uses  of  the  soil 
were  notable  discoveries  which  marked  an  epoch  in  English 
agricultural  history. 

Evils  of  the  Transition  Period.  —  We  have  spoken  so 
far  only  of  the  benefits  of  inclosure,  but  the  gain  to  society 
was  attended  with  a  good  deal  of  injury  to  individuals^nd 
Hasse,s,  The  smaU  villager  lost  an  opportunity  of  turning 
cattle  out  to  graze,  and  if  he  received  money  compensation 
'tor^this  loss  it  was  often  wasted.  The  laborer  frequently 
was  sepMSeT  from  the  soil,  and  this  misfortune  was 
greatly_^Lggra vated  by  the  fact  that  he  could  no  Jonger 
pursue  in  his  house  his  simple  spinning  and  weaving,  owing 
ttr-dhranges  brought  about  by  the  Industrial  Revolution, 
wETch  we  are  to  discuss  in  the  following  pages.  Inclosure 
was  simply  a  part  of  a  great  movement  toward  large-scale 
production,  and  in  accordance  with  the  laissez-faire  philos- 
ophy of  the  time  no  special  paijis  were  taken  to  prepare  the 
laborer  for  the  great  transition.- 

The  yeomen,  too,  were  greatly  affected  by  the  movements 
of  the  times,  and  indeed  tended  rapidly  to  disappear  as  a 
class.  Inability  to  meet  the  burden  of  heavy  mortgages 
and  the  temptation  to  sell  their  land  to  rich  business  men. 


THE  INDUSTRIAL  STAGE   IN  ENGLAND  57 > 

who  coveted  the  social  status  and  political  rights  of  landlord- 
ship,  may  have  been  cooperating  influences ;  but  the  superior 
advantages  of  extensive  holdings  for  the  growth  of  grain  by 
the  new  scientific  tnethods  of  cultivation  certainly  appear 
to  have  prompted  many  of  them  to  change  their  lot  for  that 
of  large  tenant  farmers.  The  economic  trend,  in  fact, 
favored  large  farming  at  the  time,  and  placed  a  discount  in 
comparison  on  the  methods  of  small  cultivation.  This  was 
the  reverse  side  of  the  shield,  the  front  of  which  was  agri- 
cultural improvement.  The  small  man  was  not  equal  to  the 
situation,  which  could  have  been  met  only  by  wisely  con- 
trived social  planning  and  social  action.  Each  man  had  to 
look  out  for  himself,  make  his  own  contracts,  seek  his  own 
employment,  find  it  or  go  without,  educate  or  not  educate 
his  children  as  he  saw  fit,  etc.  In  fact,  the  entire  life  of  the 
village  community  was  radically  altered.  It  was  no  longer 
an  organic,  self-centered  whole. 

'  Manufacture.  —  But  it  was  in  the  department  of  manufac- 
tures that  the  greatest  change  was  to  occur.  In  1760,  the 
system  of  hand  manufactures  was  still  general.  When  Adam 
Smith,  in  his  Wealth  of  Nations,  published  in  1776,  wrote,  • 
"  A  man  grows  rich  by  employing  a  multitude  of  manu- 
facturers," he  was  using  the  word  manufacturers  in  its  then 
usual  sense,  to  denote  artisans  or  mechanics.  The  principal 
manufactures  were  woolen  goods,  which  England  exported 
in  1770  to  the  value  of  about  £4,000,000,  that  being  nearly 
a  third  of  her  total  export  trade.  The  methods  of  manu- 
facture were  primitive.  In  the  textile  industry,  for  instance, 
the  "  manufacturer  "  had  his  home,  his  cows,  his  horse,  and 
his  poultry;  he  bought  his  wool;  his  wife  and  "spinster" 
daughters  spun  it  into  j^arn ;  and  together  they  wove  it  and 
sold  it  at  the  "fair,"  enjoying  all  the  proceeds.  As  the 
spinning  on  the  old  spinning-wheel  was  done  one  thread  at 


58  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

a  time,  it  followed  that  a  weaver  with  a  hand-loom  could 
work  up  the  yarn  more  rapidly  than  it  could  be  spun. 

Even  before  1760,  however,  a  change  in  the  system  of 
making  and  marketing  had  already  begun.  Cities  began 
to  attract  the  hand-workers.  The  inevitable  tendency 
to  divide  the  processes  of  production  showed  itself.  The 
workers  found  it  difficult  to  attend  to  the  buying  of  the  wool, 
the  spinning,  the  weaving,  and  the  selling  of  the  finished 
goods.  So  the  processes  were  divided,  and  middlemen  had 
begun  to  appear,  who  bought  yarn  from  the  spinners  and  sold 
it  to  the  weavers.  Later,  in  some  cases,  they  ceased  to  sell 
the  yarn,  supplying  it  instead  to  the  weavers  on  contract, 
keeping  a  claim  upon  the  cloth,  and  paying  a  stipulated  sum 
for  the  weaving.  Thus  the  old  "  manufacturer  "  had  al- 
ready in  many  places  become  a  workman,  a  wage-earner, 
and  in  a  measure  dependent  upon  a  "  capitalist,"  who  fur- 
nished the  stock.  Many  of  the  germs  of  the  factory  system 
therefore  existed  as  early  as  1760,  though  as  yet  the  work 
was  generally  done  by  hand  power  with  very  simple  imple- 
ments. 

What  has  just  been  said  in  describing  the  technical  con- 
ditions in  the  woolen  industry  would  apply  with  only  neces- 
sary changes  to  the  other  old  English  handicrafts.  Next  in 
importance  to  the  woolen  industry  was  that  of  iron;  but 
England  in  1737  imported  perhaps  twenty  thousand  tons 
of  iron,  or  more  than  she  herself  produced.  After  1740  the 
iron  trade  had  begun  to  fall  off  because  supplies  of  charcoal  for 
the  charcoal  smelting  of  the  time  were  almost  exhausted. 
Other  forms  of  manufacture,  that  are  now  of  first  impor- 
tance in  England,  such  as  cotton,  linen,  and  silk,  had  hardly 
begun. 

Transportation.  —  Such  goods  as  were  manufactured 
could  be  moved  within  the  country  only  with  great  difficulty 


THE   INDUSTRIAL   STAGE   IN   ENGLAND  59 

and  at  great  expense.  Transportation  facilities  were  very 
backward.  One  traveler  of  the  time,  who  speaks  of  the 
highways  as  "  most  execrably  vile,"  tells  us  that  he  fomid 
ruts  four  feet  deep,  and  that  he  "  saw  three  carts  break  down 
in  a  mile  of  road."  Such  being  the  condition  of  the  roads, 
pack  horses  were  still  the  common  means  of  transporting 
goods  to  and  from  inland  markets.  The  only  improvement 
before  1760  consisted  in  the  building  of  a  few  canals. 

Economic  Legislation.  —  Of  all  the  characteristic  condi- 
tions, that  of  the  economic  legislation  of  the  period  seems  most 
strange  to  the  modern  reader.  The  medieval  notion  of 
government  was  still  nominally  in  force.  In  general,  this 
notion  was  that  detailed  special  legislation  was  required 
for  many  cases  in  which  we  of  to-day  regard  general  laws  as 
preferable.  Thus  the  state  passed  many  laws  to  regulate 
religion,  agriculture,  manufacture,  and  commerce.  Some  of 
these  laws  require  our  special  attention  at  this  point.  We 
have  already  remarked  upon  the  fact  that  men  of  the  earlier 
days  did  not  understand  or  believe  in  competition.  They 
dreaded  the  mischief  that  a  stranger  might  work,  coming 
into  a  town  and  carrying  on  trade  in  an  irregular  fashion. 
The  circulation  of  laborers  from  one  parish  to  another,  or 
from  one  town  to  another,  was  also  restricted  by  what  is 
sometimes  known  as  the  Law  of  Settlement  This  originated 
in  a  statute,  passed  in  1662,  which  provided  that  a  workman 
coming  to  a  parish  must,  within  forty  days  of  his  coming, 
give  evidence  or  surety  guaranteeing  the  parish  against  his 
becoming  a  charge  upon  the  taxes  for  the  relief  of  the  poor. 
The  act  was  originally  intended  as  a  measure  against  wastrels 
and  vagabonds.  In  its  application,  however,  it  not  only 
affected  vagabonds  but  every  poor  man  wishing  to  move 
from  one  parish  to  another,  until  it  became,  in  Adam 
Smith's  words,  "  often  more  difficult  for  a  poor  man  to  pass 


60  ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

the  artificial  boundary  of  a  parish,  than  an  arm  of  the  sea 
or  a  ridge  of  high  mountains."  Another  law  obstructing  the 
'free  circulation  of  labor  from  one  employment  to  another 
was  the  Elizabethan  Statute  of  Apprenticeship,  providing 
that  one  could  become  a  member  of  a  trade  only  after  seven 
years  of  apprenticeship  and  only  in  a  specially  prescribed 
manner.  This  statute  was  based  upon  older  statutes  of  the 
craft-gilds  existing  for  centuries  before.  The  purpose  of 
this  regulation  was  to  protect  the  various  trades  from  over- 
crowding and  from  irregular  methods.  It  must  be  remem- 
bered that  at  the  time  when  such  regulations  had  grown  up 
competition  in  the  modern  sense  was  an  impossibility,  and 
nothing  but  such  customary  or  legal  restrictions  could 
avail  to  guard  the  interests  of  the  individual  and  society. 

Wages.  —  Perhaps  the  most  striking  of  all  the  economic 
legislation  of  the  time  was  the  old  law  which  left  to  the  boards 
of  county  judges  the  work  of  fixing  the  wages  of  workmen. 
Historians  differ  in  opinion  as  to  how  generally  or  rigorously 
this  law,  which  was  embodied  in  many  statutes  running 
back  for  centuries,  had  been  enforced,  but  probably  it  had 
never  been  entirely  inoperative,  and  in  any  event  the  exist- 
ence of  such  statutes  throws  a  flood  of  light  upon  the 
state  of  mind  of  the  dominant  classes  in  England. 

In  explanation  of  the  law  it  was  often  held  that  workmen 
would  be  oppressed  if  left  to  the  mercy  of  employers ;  but 
the  main  purpose  of  the  law  seems  rather  to  have  been  to 
protect  the  employer  against  high  wages,  and  the  spirit  of 
the  administration  of  the  law  seems  to  have  conformed  to 
that  purpose.  Inasmuch  as  the  workmen  were  thus  "  pro- 
tected "  by  law  in  the  matter  of  their  wages,  combinations 
among  them  to  improve  their  condition  were  held  unneces- 
sary and  dangerous,  and  were  therefore  strictly  forbidden. 

The  Condition  of  Thought  in  1760.  —  We  should  fail  to 


THE   INDUSTRIAL  STAGE  IN  ENGLAND  61 

understand  the  Industrial  Revolution  were  we  to  confine 
our  attention  to  the  economic  life.  In  1760  there  had 
recently  begun  a  tremendous  revolt  against  the  whole  system 
of  legislation  and  government  just  described.  But  it  would 
be  a  mistake  to  suppose  that  this  revolt,  which  eventually 
carried  everything  before  it,  showed  itself  only  in  the  field 
of  industry.  Indeed,  the  restrictions  that  aroused  the 
greatest  opposition  were  those  upon  conscience  and  religious 
worship.  Next  to  religious  liberty,  political  liberty  was  the 
desire  of  all  Englishmen.  Even  while  restrictions  upon 
trade  were  being  accepted  without  vigorous  protest,  the  pas- 
sion for  personal  liberty  worked  itself  up  to  a  fanaticism. 

It  was  under  the  influence  of  this  spirit  of  protest  that 
Adam  Smith  wrote,  and  in  1776  published,  his  Wealth  of 
Nations,  the  most  influential  book  on  economics  that  has 
ever  been  written.  Men  —  so  runs  his  argument  —  are 
by  nature  free  and  equal.  Inequalities  are  of  man's  making, 
and  are  to  be  avoided.  Leave  men  alone  and  equality  will 
reassert  itself.  What  men  need  in  their  business  is  not 
protection  but  liberty.  Under  a  system  of  free  competition 
each  man  will  seek  his  own  interest,  and,  in  ^seeking  his  own 
interest,  will  be  led  by  a  sort  of  natural  and  beneficent  provi- 
dence to  promote  the  best  interests  of  society  as  well.  If  the 
result  is  not  the  best  that  is  ideally  conceivable,  it  is  at  least 
the  best  that  is  practically  possible,  and  is  certainly  better, 
thought  Smith,  than  can  come  from  any  interference  of 
government. 

There  is  an  interesting  story,  perhaps  apocryphal,  that 
at  about  this  same  time  in  France  a  group  of  merchants 
presented  themselves  before  their  king  to  protest  against 
restrictions  under  which  they  labored.  The  king,  after 
listening  to  their  statement,  asked  them  benevolently  what 
they  would  have  him  do.     Whereupon,  as  the  story  runs. 


62       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  spokesman  of  the  party,  Monsieur  de  Gournay,  an- 
swered laconically:  "Sire,  laissez-faire;  laissez  passer." 
These  words  "  laissez  faire  "  have  for  a  century  been  used 
to  describe  the  economic  philosophy  and  the  political  prac- 
tice of  passivism,  especially  in  industry.  Whether  such  an 
incident  gave  rise  to  the  name,  or  whether  the  name  made  the 
myth,  is  immaterial.     The  story,  if  not  true,  is  well  found. 

Changes  in  Manufacture.  —  In  1769,  while  Adam  Smith 
was  writing  the  book  that  was  to  exert  so  profound  an  in- 
fluence upon  the  economic  thought  and  practice  of  the 
future,  a  friend  of  his,  James  Watt  by  name,  was  preparing 
the  way  for  a  revolution  in  the  world's  industry,  by  his 
inventions  in  connection  with  the  steam  engine. 

In  the  same  year,  too,  there  began  a  series  of  inventions 
which,  during  the  next  fifty  years,  completely  revolutionized 
the  textile  industry,  and  incidentally  gave  cotton  manu- 
facture, instead  of  the  manufacture  of  woolens,  the  first  place 
in  English  industry.  The  invention  of  the  spinning- jenny 
first  made  possible  a  vast  increase  in  the  production  of  yarn 
for  weaving,  and  since  better  goods  could  now  be  produced 
at  a  lower  price  than  before,  the  demand  for  the  goods  was 
much  increased.  Hence  weavers,  still  using  the  old  hand- 
loom,  were  kept  busy  at  higher  wages  than  they  had  before 
received.  But  within  a  few  years  the  power-loom  for  weav- 
ing was  invented  and  improved,  and  many  of  the  weavers 
found  themselves  out  of  employment.  As  it  was  possible 
for  a  single  person  to  tend  four  power-looms,  three  out  of 
four  of  the  workmen  were  thrown  out  of  a  job  until  the  in- 
creased demand  for  the  finished  goods  should  increase  the 
number  of  looms.  Moreover,  as  weaving  by  the  power- 
looms  required  deftness  rather  than  strength,  women  and 
children  came  to  be  employed  instead  of  men,  because  they 
could  be  hired  at  lower  wages.    Just  at  the  close  of  the 


THE  INDUSTRIAL  STAGE  IN  ENGLAND  63 

century,  Eli  Whitney,  our  Connecticut  Yankee,  gave  a  still 
further  stimulus  to  the  cotton  industry  by  inventing  the 
cotton  gin,  a  device  for  clearing  the  cotton  of  its  seed.  The 
greatest  change  was  wrought  in  the  cotton-manufacturing 
industry.  For  technical  reasons  England  had  been  unable 
to  establish  this  industry,  which  was  carried  on  chiefly  in 
India ;  but  the  new  inventions  for  textile  manufacture  and 
the  introduction  of  steam  power  quickly  changed  the  seat 
of  the  industry  from  India  to  England,  and  gave  it  a  fore- 
most place  in  the  English  economy.  Similar  results  at- 
tended changes  in  the  manufacture  of  woolen,  linen,  and 
silk  goods. 

The  new  machinery  was  at  first  operated  by  water  power, 
and  factories  first  sprang  up  chiefly  in  North  England  in 
places  where  rapidly  flowing  streams  furnished  an  economical 
"  head."  Soon,  with  the  development  of  the  steam  engine, 
and  the  resulting  development  of  coal  production,  the  center 
of  industry  was  transferred  to  the  "  Midland  "  counties, 
where  England's  iron,  the  material  of  her  machines,  and 
England's  coal,  the  basis  of  her  motive  power,  underlie  the 
whole  region. 

By  the  invention  of  the  steam  engine,  the  output  of 
England's  coal  mines  was  vastly  increased,  since  shafts  could 
now  be  sunk  deeper  and  the  mines  kept  free  from  water. 
With  increased  supplies  of  coal,  iron  could  be  worked  by  the 
blast  furnace,  instead  of  by  the  old  process  of  charcoal 
smelting,  and  the  iron  trade  was  therefore  quickly  revolu- 
tionized. The  importance  of  this  change  may  be  understood 
when  we  remember  that  under  modern  conditions  of  industry 
those  nations  that  surpass  in  the  production  and  manufacture 
of  iron  and  steel  for  their  machinery  hold  the  leadership  of 
the  world's  trade,  v 

Changes    in    Transportation.  —  The    great    change    in 


64         ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

methods  of  farming  and  manufacturing  naturally  gave  a 
new  stimulus  to  the  development  of  improved  transportation 
facilities.  The  public  highways  were  first  greatly  improved 
under  the  direction  of  such  engineers  as  Telford  and 
Macadam,  from  whom  methods  of  road  construction  have 
taken  their  names.  New  and  longer  canals  were  dug,  and 
the  movement  would  have  gone  much  farther  had  it  not 
been  checked  after  1825  by  the  development  of  the  sys- 
tem of  steam  railways.  Even  before  1825,  when  the  first 
steam  railway  was  opened,  steam  had  for  some  years  been 
successfully  applied  to  water  transportation.  Within  a  half 
century,  England  became  one  vast  network  of  railways,  and 
it  became  possible  to  transport  the  bulkiest  commodities 
from  one  end  of  the  kingdom  to  the  other  more  cheaply 
than  they  had  been  moved  from  one  county  to  another  with 
the  old  means  of  transport.  Indeed,  wheat  can  now  be 
carried  from  our  Western  grain  fields  and  laid  down  in  the 
English  markets  more  cheaply  than  it  could  be  moved  an 
average  distance  of  from  thirty  to  forty  miles  in  the  England 
of  1760. 

Changes  in  Economic  Legislation.  —  With  the  passing  of 
the  old  industrial  methods  came  a  demand  for  freedom  from 
the  old  vexatious  restrictions.  Whatever  might  have  been 
said  in  justification  of  such  restrictions  in  earlier  days,  the 
time  for  them  had  now  passed,  and  they  were  destined  to  go. 

The  old  laws  were,  of  course,  not  repealed  in  a  body. 
Such  a  thing  never  happens  in  England,  and  is  a  rare  occur- 
rence in  any  country.  Some  laws  were  repealed,  some  simply 
died.  Thus,  the  law  requiring  seven  years'  apprenticeship 
before  one  could  enter  certain  trades  died  during  the  latter 
part  of  the  eighteenth  century.  Years  afterward,  at  the 
beginning  of  the  nineteenth  century,  in  the  labor  troubles 
of  the  time,  some  workmen  in  desperation  turned  back  to 


THE  INDUSTRIAL  STAGE   IN   ENGLAND  65 

the  old  law  and  prosecuted  employers  for  violating  it. 
The  result  was  that  the  law  was  at  first  suspended  and  later 
repealed,  as  being  plainly  ill  adapted  to  the  new  conditions 
of  industry.  Thus,  little  by  little,  the  old  laws  were  re- 
pealed or  forgotten,  and  men  were  left  free  to  bargain  and 
manufacture  as  they  pleased. 

Labor  Laws.  —  Of  the  many  old  laws  regulating  labor,  it 
must  be  remembered  that  they  had  been  designed  not  so 
much  to  help  the  workmen  as  to  check  their  growing  power 
and  aspirations.  When  Adam  Smith  declaims  against  labor 
laws,  he  has  in  mind  laws  directed  against  labor,  not  laws 
like  those  of  modern  times,  which  have  been  designed  to 
benefit  workmen.  Indeed,  he  says  in  one  place  that  if  any 
law  chanced  to  be  beneficial  to  labor,  it  was  sure  to  be  a 
just  law.  A  striking  instance  of  the  unfairness  of  the  old 
labor  laws  is  seen  in  the  case  of  the  statutes  against  combina- 
tions. Although  from  the  first  capitalists  were  allowed  to 
combine,  workmen  were  forbidden  to  do  so  under  severe 
penalties.  Even  after  the  laws  bearing  on  apprenticeship, 
regulation  of  wages,  and  inspection  of  goods  had  been  re- 
pealed or  had  lapsed,  this  law  against  workmen's  combina- 
tions continued  operative,  and  under  it  men  who  attempted 
to  form  labor-unions  were  at  times  severely  punished.  But 
eventually  this  law  also  was  repealed.  «r 

Results  of  the  Changes.  —  1.  Industrial  Disturbance. — 
The  results  of  the  great  changes  that  constituted  the 
Industrial  Revolution  have  been  startling.  The  area  of 
the  markets  for  various  commodities  was  marvelously 
widened,  and  distance  from  the  consumer  no  longer  weighed 
heaviJ^LilLlhejmind  of  the  manufacturer  in  determining  the 
placing  of  his  plant.  The  balance  of  convenience  rather 
inclined  toward  cgncentLating  industries .  in.  those  places 
where  they  could  be  carried  on  to  special  advantage.    Thus, 


66  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

there  was  first  a  concentration  of  industries  near  favorable 
water  power,  and  later  near  facilities  for  the  production  of 
steam  power.  This  change  took  place  usually  not  by  the  re- 
moval of  old  plants  and  industries  to  new  localities,  but  by 
the  growth  in  favorable  centers  of  such  powerful  rivals  that 
the  older  factories  were  gradually  forced  to  go  out  of  business. 
Thus,  not  only  were  country  artisans  forced  out  of  employ- 
ment, but  even  certain  towns  were  sacrificed  to  others  that 
enjoyed  a  more  favorable  situation. 

2.  Growth  of  Cities.  —  Another  important  result  of  the 
changes  in  the  methods  of  industry,  and  particularly  of  the 
changes  in  the  methods  of  transportation,  was  the  growth  of 
cities.  While  concentration  of  population  has  had  many 
beneficent  results,  and  promises  still  other  and  greater  ones 
in  the  future,  the  evils  connected  with  such  aggregations  of 
people  have  formed  one  of  the  most  serious  problems  that 
our  generation  has  to  face. 

3.  Fluetitations  in  Trade.  —  One  cause  of  the  comparative 
simplicity  of  the  old  and  slow-going  system  of  manufacture 
and  trade  was  its  great  regularity.  One  year  was  much  like 
another.  Producers  could  calculate  the  amount  of  their 
product  that  would  be  required,  and  could  calculate  also 
w^hat  would  be  the  return  to  their  labor.  With  the  growth  of 
national  and  international  markets  came  increasing  com- 
plexity of  wants  and  increasing  fickleness  of  fashion.  It  was 
no  longer  easy  to  know  what  things  would  be  wanted  or  in 
what  quantities  goods  would  be  taken  by  consumers  when 
produced.  A  period  of  overcautious  production  would  lead 
to  unduly  high  prices.  New  capital  would  be  tempted  by 
the  profits,  and  the  old  manufacturers  would  forget  their 
caution.  Then  would  come  a  glut,  prices  would  fall  dis- 
astrously, factories  would  close,  and  workmen  would  be 
thrown  out  of  employment.     But  depriving  a  large  section 


THE  INDUSTRIAL  STAGE   IN  ENGLAND  67 

of  the  consuming  public  of  its  purchasing  power,  —  its  wages, 
-^  is  not  an  ideal  method  of  reviving  industry.  Thus  times 
of  plenty  for  the  workmen  would  be  succeeded  by  times 
of  great  want,  with  all  the  evil  result  upon  character  that 
uncertainty  of  life  and  work  can  produce. 

Reaction  against  the  Passive  Policy  of  Government.  — 
We  have  already  explained  that  accompanying  the  change 
in  industrial  methods  went  a  radical  change  in  opinion  as 
to  the  proper  attitude  of  the  state  toward  human  affairs, 
including  industrial  affairs.  This  change  was  in  part  due 
to  a  feeling  that  men  had  really  become  so  intelligent  and 
reasonable  and  just  that  they  would  know  and  respect  one 
another's  rights.  But  the  chief  reason  for  the  change  was 
the  general  acceptance  of  Adam  Smith's  central  doctrine  that 
self-interest  will  regulate  men's  actions  for  the  general  good 
more  nearly  and  more  surely  than  can  any  statutes  framed  by 
man.  We  have  now  to  study  in  detail  some  of  the  points  in 
which  this  theory  of  governmental  passivity  has  broken  down 
under  the  test  of  experience,  and  some  changes  that  men  have 
found  themselves  compelled  to  make  in  consequence. 

Although  we  shall  have  occasion  to  refer  to  the  matter 
again  in  studying  the  industrial  history  of  our  own  country, 
it  may  be  well  to  point  out  here  that  in^nq,  other  country 
did  the  laissez-faire  idea  gain  such  a  hold  upon  tlielHiTlds^f 
the  people  asjnJ^StJ^i^d  -S^ft^eeT— ^ the  great  modern 
nations  Germany  was  probably  least  affected  by  the  obses- 
sion, and  France  less  than  England,  while  even  in  England 
recognition  of  the  necessity  of  social  control  of  industrial 
forces  and  movements  developed  gradually  during  the  nine- 
teenth century.  In  our  own  country  we  were  so  slow  in 
awaking  that  some  critics  feel  that  we  almost  lost  our 
birthright  to  our  wonderful  natural  inheritance.  Indeed  it 
is  only  during  the  few  years  of  the  present  century  that  we 


68  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

have  become  alert  to  the  situation ;  and  we  are  still  confused 
as  to  remedies,  however  painfully  conscious  we  may  be  of 
the  evils  of  our  plight.  The  acuteness  of  our  situation,  and 
the  suddenness  of  our  reaction  from  our  earlier  optimism 
and  credulity,  probably  constitute  the  best  single  explana- 
tion of  the  violence  and  uncertainty  of  the  social,  political, 
and  legal  revolution  through  which  we  are  now  passing. 

1.  Public  Inspection  of  Goods.  —  In  repealing  the  old  laws 
for  the  inspection  of  wares,  it  was  claimed  that  under  the 
free  play  of  self-interest  in  competition,  cheating  would  not 
pay  and  would  therefore  cure  itself.  Needless  to  say,  these 
hoi>es  were  never  realized.  Men  might  perhaps  be  safely 
left  to  pursue  their  own  interest  in  buying  goods  if  they  knew 
enough  to  do  so,  but  as  a  matter  of  fact  they  do  not.  In- 
deed, it  was  far  easier  to  assure  oneself  of  the  quality  of 
one's  purchases  in  the  old  days  when  the  goods  were  of  less 
variety,  were  more  simple  in  their  character,  and  were  made 
by  craftsmen  who  were  not  remote  from  the  purchaser.  But 
who  in  our  day  can  tell  the  quality  of  baking-powder,  of 
ground  spices,  or  of  a  thousand  and  one  things  that  are 
subject  to  adulteration  ?  How  many  can  distinguish  butter 
from  oleomargarine?  How  many  can  detect  fever  germs  in 
water  or  trichinae  in  pork?  For  all  these  and  many  other 
things  the  ordinary  buyer's  knowledge  is  worthless:  an 
expert  must  be  employed.  And  what  guarantees  of  honest 
wares  are  offered  by  modern  commerce,  in  which  it  is  some- 
times open  to  question  whether  greater  profits  can  be  realized 
by  following  the  principle  that  "  a  satisfied  customer  is 
our  best  advertiser  "  or  by  unscrupulous  reliance  on  easy 
methods  of  gulling  the  public  ?  Such  questioning  has  been 
justified  by  the  experience  of  the  English  people,  and  their 
law  now  provides  for  the  inspection  by  government  experts 
of  meat  and  fish,  groceries,  drugs,  butter,  and  other  articles 


THE  INDUSTRIAL  STAGE  IN  ENGLAND  69 

of  food.  Gold  plate  and  silver  plate,  gun  barrels,  steam 
boilers,  drains  and  sewers,  gas,  weights  and  measures,  — 
all  these  are  tested  on  the  same  general  principle  that  the 
government  through  experts  must  guard  the  people  from 
those  serious  dangers  against  which  they  cannot  or  habit- 
ually do  not  protect  themselves.  In  reality,  men  do  of 
course  in  this  case  protect  themselves,  but  they  do  so  through 
their  government,  which  represents  their  cooperative  effort, 
rather  than  each  man  for  himself.  For  every  man  to  attempt 
to  do  everything  directly  for  himself  would  be  to  return  to 
barbarism.  Division  of  labor  and  cooperation  are  causes 
and  signs  of  advancing  civilization. 

2.  Social  Protection  of  Labor.  —  Nowhere  was  freedom 
more  absolutely  demanded  at  the  time  of  the  Industrial 
Revolution  than  for  labor,  and  nowhere  was  it  more  needed. 
The  old  restrictions  were  galling  and  burdensome  alike  t(L 
masters  and  men.  But  what  of  the  freedom  that  took  their 
place  ?  When  machinery  was  introduced,  it  became  possible 
to  employ  women  and  children  in  work  that  had  formerly 
required  the  labor  of  men.  But  modern  machinery  is  as 
destructive  of  life  as  a  cannon  if  human  life  gets  in  its 
way;  and  the  destruction  of  life  and  limb  in  the  early  days 
of  machinery  was  appalling.  Here  again  it  had  been  ingen- 
iously argued  that  self-interest  would  lead  employers  to 
protect  their  employees  from  injury  of  every  kind.  The 
basis  of  the  argument  was  of  course  the  assumption  that 
such  protection  would  be  to  the  benefit  of  the  employers. 
But  this  assumption  is  not  valid. 

So  scandalous  was  the  neglect  of  the  early  manufacturers 
that  a  reaction  set  in  against  the  old  license,  and  laws  were 
passed  requiring  under  heavy  penalties  what  the  simplest 
dictates  of  humanity  ought  to  have  secured  and  would  have 
secured  if  men  had  been  fit  to  be  left  to  unregulated  competi- 


70  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

tion.  The  employment  of  children  four  and  five  years  of 
age,  bad  ventilation  in  factories,  working  over  hours,  neglect 
of  children's  education,  and  many  other  evils,  called  for  a 
like  interference. 

The  result  of  a  public  recognition  of  these  evils  was  a 
series  of  Acts  of  Pariiament,  known  as  the  Factory  Acts, 
beginning  with  that  of  1802  and  running  down  to  the  pres- 
ent time.  Laws  now  in  force  provide,  among  other  things, 
for:  (1)  the  fencing  in  of  all  dangerous  machinery;  (2) 
ventilation  and  other  sanitary  conditions  in  factories;  (3) 
a  ten-hour  working  day  for  women,  "  young  persons,"  and 
children,  in  most  industries;  (4)  a  Saturday  half  holiday 
for  women,  "  young  persons,"  and  children ;  (5)  prohibition 
of  employment  of  any  persons  under  eleven  years  of  age,  — 
or  of  persons  under  sixteen,  unless  they  present  a  certificate 
of  fitness;  (6)  schooling  for  children  half  of  each  day  or 
full  hours  on  alternate  (Jays ;  (7)  the  keeping  of  a  register 
by  employers  in  which  they  must  enter  all  children  under 
16  to  whom  they  give  out  work,  thus  giving  opportunity  to 
inspectors  to  inspect  the  places  where  such  work  is  done; 
(8)  government  inspectors  to  see  to  the  enforcement  of  the 
law.  This  last  provision  has  been  found  by  experience  to 
be  one  without  which  the  rest  of  the  legislation  might  as 
well  not  have  been  passed.  In  contrast  with  the  provision 
which  limits  the  work  of  women  and  children  to  not  more 
than  ten  hours  per  day,  place  the  old  law  of  apprenticeship 
by  which  a  boy  must  work  at  least  from  five  in  the  morning 
till  between  seven  and  eight  at  night,  with  time  off  for 
meals.  The  change  is  significant  as  showing  that  whereas 
the  old  laws  were  framed  in  the  interest  of  employers, 
modem  ones  have  been  designed  in  the  interest  of  employees, 
or,  to  consider  it  more  broadly,  in  the  permanent  interest  oj 
the  people  as  a  whole. 


THE  INDUSTRIAL   STAGE   IN   ENGLAND  71 

3.  Trade-unions  and  the  Government.  —  As  the  wage  sys- 
tem developed  during  the  Industrial  Revolution  there  was  a 
natural  tendency  for  the  wage-earners  to  group  themselves 
by  trades  into  unions  for  the  protection  of  their  interests. 
So  jealous  were  the  ruling  classes,  and  so  fearful  lest  the  lower 
classes,  who  greatly  outnumbered  them,  might  by  combining 
abate  their  power,  that  they  had  passed  laws  against  such 
combinations  at  intervals  ever  since  1360.  Hence,  when  the 
wage-earners  found  the  need  of  union  rapidly  increasing,  they 
were  driven  to  secret  organization  for  lack  of  the  open 
methods  which  were  denied  them.  In  1800,  Parliament, 
finding  that,  in  spite  of  the  law,  unions  were  steadily  gaining 
in  strength  and  numbers,  passed  a  comprehensive  law  to 
suppress  them,  even  declaring  illegal  "  all  agreements  be- 
tween journeymen  and  workmen  for  obtaining  advances 
of  wages,  reduction  of  hours  of  labor,  or  any  other  changes 
in  the  conditions  of  work." 

So  odious  did  this  law  become  that  employers  sometimes 
voluntarily  pledged  themselves  not  to  have  recourse  to  it. 
In  1824,  after  a  prolonged  agitation  led  by  Francis  Place, 
who  at  first  received  less  support  than  might  have  been 
expected.  Parliament  confessed  the  law  a  mistake,  and  at 
the  same  time  repealed  earlier  laws  relating  to  combinations 
of  workmen.  Thus  freed  from  outlawry,  trade-unions 
grew  at  an  astounding  rate.  But  they  were  still  subject 
to  legal  persecution  of  one  sort  or  another.  Especially 
did  they  suffer  at  the  hands  of  the  courts  from  adverse  deci- 
sions which  declared  their  united  efforts  to  advance  their 
interests  conspiracies  "in  restraint  of  trade."  In  1875,  a 
law  was  passed  which  expressly  declared  that  the  purposes 
and  actions  of  trade-unions  were  not  to  be  held  unlawful  on 
the  ground  that  they  were  in  restraint  of  trade,  and  in  the 
second  place,  that  acts  which  are  lawful  when  done  by  one 


72  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

person  shall  be  held  lawful  even  when  done  by  two  or  more 
conjointly,  if  such  acts  are  in  furtherance  of  an  object  sought 
through  a  trade  dispute.  Finally,  in  1906,  The  Hudson 
Trades  Dispute  Act  conferred  still  further  immunities  and 
privileges  upon  trade-unions  in  the  matter  of  strikes,  boy- 
cotts, and  picketing. 

Moreover,  during  recent  years  England  has  introduced 
sickness  and  accident  insurance,  old-age  pensions,  minimum 
wage  regulations  in  "  sweated  "  trades,  to  mention  only  a 
few  features  of  her  provision  for  the  welfare  of  the  working 
classes. 

Conclusion. — We  have  pointed  out  a  few  of  the  many  ways 
in  which  the  new  theory  failed  to  justify  itself  when  applied 
to  the  new  economic  power.  The  new  power  was  that  which 
created  the  revolution.  The  new  theory  was  that  which 
asserted  the  universal  efficacy  and  beneficence  of  unrestrained 
industrial  freedom,  or  unregulated  competition.  The  theory 
and  the  power  were  alike  strange  to  men.  The  new  theory 
promised  an  immense  increase  in  the  product  of  national 
industry  and  a  just  distribution  of  the  product  among  those 
who  contributed  to  its  making.  An  immense  increase  of 
product  there  was,  though  this  was  due  to  inventions  and 
to  enlarged  markets  as  well  as  to  competition.  But  the 
theory  failed  to  fulfill  its  promise  as  to  the  distribution  of 
the  new  wealth.  Not  until  benevolence  was  standardized 
and  enforced  by  legislation  was  the  situation  in  this  respect 
endurable.  The  reaction  against  the  theory  was  not  sudden, 
nor  was  it  a  conscious  and  definite  revolt  at  all.  The  essen- 
tially practical  and  concrete  habit  of  mind  of  the  English 
people  has  become  proverbial.  They  had  been  driven  into 
the  temporary  acceptance  of  unregulated  competition  by 
the  great  changes  in  industry.  When  weakness  in  the  ac- 
tion of  that  principle  became  manifest,  they  simply  changed 


THE  INDUSTRIAL  STAGE  IN  ENGLAND  73 

its  action  little  by  little  by  applying  the  regulative  power  of 
society.  And  when  the  nineteenth  century  had  passed,  it 
was  found  that  the  good  in  the  competitive  principle  had 
been  retained,  while  the  principle  in  its  universal  form  had 
ceased  to  command  assent.  When,  therefore,  we  hear  the 
principle  of  a  ^'  fair  field  and  no  favor  "  and  "  no  state  inter- 
vention "  advocated  by  a  man  strong  in  the  consciousness  of 
personal  advantages,  —  for  such  he  is  likely  to  be,  —  we 
may  know  that  he  is  a  full  century  behind  his  time,  and 
that  he  has  not  read  or  has  not  profited  by  one  of  the  most 
impressive  chapters  of  hmnan  history.  For  the  English 
nation  to-day,  after  a  fair  trial  of  free  competition  without 
interference  by  organized  society,  has  undeniably  returned 
to  the  principle  of  collective  action  which  she  had  sought  to 
abandon.  Bitter  experience  has  taught  her  that  it  is  among 
the  true  functions  of  society  to  protect  its  citizens  and 
to  further  their  material  and  social  well-being  by  every  law 
and  every  activity  which  can  contribute  to  that  end. 

SUMMARY 

1.  In  1760  agriculture  was  still  primitive,  manufacture  was  in  the 

handicraft  stage,  and  there  was  much  restrictive  legislation. 

2.  After  1760  there  was  a  revolution  in  the  system  of  landholding 

and  landworking,  transportation  was  revolutionized,  and  the 
factory  system  was  developed. 

3.  The   Industrial   Revolution   produced   great   social   confusion, 

immoral  competition,  and  violent  fluctuations  in  trade. 

4.  A  reaction  against  the  old  absence  of  restraint  has  made  itself 

increasingly  manifest  in  the  years  that  have  followed,  and  es- 
pecially during  the  last  quarter  of  a  century. 

QUESTIONS   FOR   RECITATION 

1.  How  was  production  carried  on  before  1760?     What  was  the 

nature  of  the  markets? 

2.  What  changes  in  social  organization  resulted  from  the  Industrial 

Revolution? 


74  ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

3.  Describe  the  struggle  of  labor  unions  for  existence  and  for  legal 

recognition. 

4.  Who  was  Adam  Smith?    What  was  his  significance  as  a  voice 

of  the  time? 

5.  Discuss  the  question  of  the  passive  policy  of  government. 

QUESTIONS  FOR  STUDY  AITD   DISCUSSION 

1.  Do  you  see  any  resemblance  between  the  eighteenth  century 

struggle  of  the  handworker  against  the  factory  and  the 
present-day  struggle  of  the  village  storekeeper  against  the 
"mail  order"  department  store? 

2.  If  workers  in  the  nineteenth  and  twentieth  centuries  have  won 

stupendous   victories   from   public   opinion   and   from   law- 
X       makers,  does  the  fact  suggest  anything  as  to  the  future  of 
the  labor  movement  ? 

LITERATURE 

Cunningham,  W. :    The  Growth  of  English  Industry  and  Commerce, 

Vol.  II,  Bk.  VIII,  Pt.  II. 
Gibbins,  H.  de  B. :  Industry  in  England,  p.  204  (revised  edition). 
Hammond,  J.  L.,  and  B. :   The  Village  Laborer,  1760-1832. 
Hobson,  J.  A. :  The  Evolution  of  Modern  Capitalism,  Chs.  II  and  IV. 
Hone,  N.  J. :   The  Manor  and  Manorial  Records. 
Hutchins,  B.  L.,  and  Harrison,  A. :  A  History  of  Factory  Legislation 

(in  England). 
Innes,  A.  D. :   England's  Industrial  Development. 
Price,  L.  L. :    A  Short  History  of  English  Commerce  and  Industry, 

pp.  184-192,  192-201,  210-217. 
Prothero,  R.  E. :   English  Farming,  Past  and  Present. 
Report  of  the  United  States  Industrial  Commission,  Vol.  XVI,  on 

Foreign  Labor  Laws. 
Toynbee,  Arnold :    The  Industrial  Revolution,  Ch.  IV,  pp.  46-57. 
Webb,  Beatrice  (Potter) :   The  Case  for  the  Factory  Acts, 


CHAPTER  V 

THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES 

I.    The  Industrial  Revolution  in  the  United  States 
AND  England  Contrasted 

The  story  of  the  Industrial  Revolution  and  of  the  indus- 
trial stage  in  England  is  in  great  part  the  story  of  the  rev- 
olution and  the  stage  in  all  countries  that  have  gone 
through  it.  In  studying  the  economic  history  of  the  United 
States  for  the  same  period,  it  is  therefore  unnecessary  that 
we  should  enter  again  into  all  the  details  that  go  to  make  up 
the  great  movement.  But  as  no  two  countries  have  the 
same  racial  and  physical  peculiarities,  so  no  two  countries 
are  affected  in  precisely  the  same  way  by  great  industrial 
changes.  The  economic  history  of  the  United  States  is, 
in  part,  the  history  of  the  attempt  to  apply  the  principles  of 
free  competition  and  a  minimum  of  state  interference  to  a 
new  country  instead  of  to  an  old  one,  as  was  the  case  with 
the  English  experiment.  This  difference  is  so  great  as  to 
have  modified  the  result  materially,  and  it  will  therefore  be 
profitable  to  study  these  differences  more  particularly. 

The  principle  of  non-intervention  was  adopted  in  our  own 
country  even  more  fully  than  in  England,  where  the  state 
never  ceased  to  exercise  a  close  supervision  and  control  over 
many  life  interests,  including  religion.  In  some  respects 
the  results  in  the  two  countries  have  been  parallel,  in  others 
not.    At  first  sight  it  may  seem  that  American  experience 

75 


76      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

does  not  so  sharply  condemn  the  passive  policy  of  govern- 
ment as  does  that  of  England,  and  the  question  may  be  asked 
whether  our  conclusion  from  the  history  of  English  indus- 
trialism was  after  all  correct?  Which  of  the  two  countries 
has  given  the  principle  of  unregulated  competition  the  fairer 
test? 

It  will  be  remembered  that  the  suffering  which  attended 
the  Industrial  Revolution  in  England  was  of  two  kinds  and 
from  two  different  sources.  One  was  due  to  the  rapidity  and 
magnitude  of  the  industrial  change ;  the  other  was  due,  not 
to  the  change,  but  to  the  manner  in  which  the  change  was 
effected,  and  to  the  system  under  which  the  new  industry  was 
carried  on.  In  other  words,  one  was  due  to  change,  the 
other  to  unregulated  competition.  It  is  necessary  to  keep 
these  two  causes  distinct,  if  we  are  to  reach  a  just  conclu- 
sion regarding  the  influence  of  unrestrained  competition 
upon  industrial  life. 

1.  Comparative  Difficulty  of  Transition.  —  We  have  al- 
ready seen  how  difficult  was  the  transition  from  the  old  to 
the  new  order  in  England.  In  our  own  country,  the  diffi- 
culty was  slight,  or  perhaps  we  might  more  properly  say  that 
there  was  no  transition,  since,  when  the  Industrial  Revolu- 
tion began,  there  was  in  America  almost  no  manufacturing 
at  all.  Our  industries  were  scarcely  started  when  the  spin- 
ning-jenny, the  power  loom,  and  the  steam  engine  were 
introduced,  and  so  almost  from  the  beginning  the  factory 
system  seemed  the  natural  one.  Such  change  as  there  was 
from  hand  industries  to  power  manufacture  produced  results 
similar  to  those  witnessed  in  England;  but  the  change 
with  us  was  so  insignificant  in  extent  as  scarcely  to  attract 
public  attention.  Moreover,  artisans  who  were  thrown  out 
of  work  had  greater  opix)rtunities,  and,  on  account  of  the 
less  fixed  conditions  of  life,  were  more  ready  to  get  new  em- 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES  77 

ployment  in  the  growing  industries  of  the  time.  Thus,  the 
change  which  in  England  was  a  revolution  was  in  America 
an  evolution,  a  process  of  construction  with  httle  destruction, 
since  there  was  Httle  to  destroy. 

2.  Comparative  Difficulty  in  Operation  of  Competition.  — 
Under  the  system  of  unrestrained  competition,  the  English 
workmen  played  a  continually  losing  game ;  such  was  not  the 
case  with  their  American  cousins.  Just  as  the  smallness 
of  our  industries  at  the  beginning  of  the  Industrial  Revo- 
lution mitigated  the  sufferings  from  the  change,  so  the 
greatness  of  our  territory  mitigated  the  sufferings  from  the 
system  of  competition.  The  average  American  does  not 
reaUze  adequately  the  difference  between  Americans  and 
Europeans  in  their  readiness  to  move  about  from  place  to 
place,  a  difference  due  in  part  to  the  fact  that  all  those  now 
in  our  country  are  either  immigrants  from  other  countries 
or  the  descendants  of  immigrants  of  a  comparatively  recent 
time.  A  comparison  of  census  figures  of  our  country  with 
those  of  European  countries  shows  that  with  them  the 
proportion  of  persons  living  in  town  or  country  other  than 
that  of  their  birth  is  slight,  while  with  us  it  is  very  great. 
Thus  the  census  of  1880  disclosed  the  fact  that  only  one- 
half  of  the  native  born  inhabitants  of  the  country  were 
living  in  the  country  of  their  birth,  and  this  despite  the 
fact  that  a  large  proportion  of  the  total  population  is  made 
up  of  children,  who,  of  course,  would  generally  be  living 
in  the  country  of  birth.  Similarly,  the  census  of  1900  shows 
that  nearly  thirty-two  per  cent  of  the  total  population  of 
the  country  were  living  in  states  other  than  those  of  their  birth. 
In  1910,  as  shown  by  the  thirteenth  census,  14.7  per  cent 
of  the  whole  population  were  foreign  born,  and  21.7  per  cent 
of  the  remainder  —  or  18.5  per  cent  of  the  whole  popula- 
tion —  were  living  in  states  other  than  that  of  their  birth. 


78       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

a  total  of  33.2  per  cent.  Moreover,  throughout  our  history, 
imtil  within  recent  years,  the  American  workman  has  always 
been  able  to  secure  cheap  or  even  free  land  where  he  could 
earn  an  independent  living.  Under  these  two  conditions  of 
ready  migration  and  easy  access  to  independent  proprietor- 
ship, it  was  impossible  for  the  downward  pressure  of  competi- 
tion to  work  out  such  results  in  manufacturing  industry  as 
must  show  themselves  when  no  counteracting  influence  is 
opposed.  Indeed,  we  may  say  that  competition  in  America 
was  regulated  from  tJie  beginning,  not  by  legislation,  bvi  by 
those  great  industrial  forces  and  opportunities  which  we  have 
just  mentioned. 

But  this  influence  could  not  be  exerted  forever.  Our 
territorial  resources,  great  as  they  are,  have  their  limits. 
The  American  **  frontier  "  has  disappeared  forever.  We 
have  already  reached  the  parting  of  the  ways.  Henceforth 
our  reliance  must  be  placed  upon  some  other  agency  than  the 
free  bounty  of  nature.  As  free  land  has  become  less  and 
less  abundant,  the  w^age-earners  of  the  East  have  bad  forced 
up)on  them  conditions  of  life  that  have  kept  down,  where 
they  have  not  absolutely  lowered,  their  standard  of  life. 
Extremes  of  wealth  and  alienation  of  social  classes  have 
become  so  great  as  to  arouse  the  apprehension  of  all  thought- 
ful men.  Labor  riots  that  call  for  military  interference, 
such  as  those  at  Lawrence,  Massachusetts,  and  in  many  parts 
of  Colorado,  testify  to  the  fact  that  we  have  not  escaped, 
that  in  the  future  we  can  hope  less  and  less  to  escape,  the 
friction  that  accompanies  all  unfraternal  relations  among 
men.  We  have  been  greatly  blest  in  that  we  have  escaped 
the  worst  results  so  long. 

Concentration  and  Integration  of  Modem  Industry.  — 
Thus  far  we  have  been  considering  the  efi^ects  of  competition 
chiefly  upon  the  employees,  and  in  tracing  these  effects  the 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES  79 

history  of  England  has  been  particularly  instructive.  When, 
however,  we  turn  to  the  results  of  such  competition  in  the 
case  of  employers,  we  find  that  our  own  country  offers  the 
most  striking  illustrations.  Owing  to  the  peculiar  circum- 
stances of  our  situation,  the  results  of  competition  among 
employers  have  developed  more  rapidly  here  than  abroad. 
Though  repeated  conflicts  with  their  workmen  have  led  to 
a  certain  feeling  of  common  interest  in  the  matter  of  labor, 
and  even  to  frequent  combinations  for  mutual  defense  against 
the  demands  of  employees,  yet  on  the  other  hand  the  princi- 
ple of  competition  has  until  recently  made  them  almost 
Ishmaelites  in  their  business  relations  with  one  another. 
Those  resources  to  which  we  have  referred  as  mitigating 
the  suffering  of  employees  have  not  in  the  same  way  been 
available  to  the  employers.  Tied  down  to  their  large  in- 
vestments of  fiixed  capital,  they  have  too  often  been  com- 
pelled to  stand  and  fight  out  to  the  end  this  war  without 
quarter.  In  every  such  warfare  the  number  of  combatants 
tends  to  decrease.  As  old  rivals  are  killed  off,  the  successful 
survivors  acquire  greater  skill  and  greater  power  in  the 
conflict.  With  the  passage  of  time  greater  and  greater 
equipment  is  required  to  give  any  hope  of  a  successful 
struggle.  There  are  industries  in  which  no  such  concen- 
tration has  taken  place,  but  for  a  great  and  apparently 
growing  number  of  industries  our  description  holds  true. 
Thus,  in  spite  of  the  enormous  growth  of  our  industries  and 
population,  the  relative  number  of  competitors  in  many 
industries  has  of  late  shown  noticeable  decrease.  We  cite 
but  one  instance,  and  that  not  the  most  striking,  from  the 
twelfth  and  thirteenth  censuses  of  the  United  States.  In  the 
report  of  the  twelfth  census,  occurs  the  following:  "The 
present  tendency  toward  large  industries  under  one  manage- 
ment is  illustrated  in  the  statistics  of  coke  production  in 


80        ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

1899.  The  total  amount  of  coke  produced  has  increased 
96.2  per  cent,  and  the  value  of  all  products  '*  (including  by- 
products) "  has  increased  115.7  per  cent,  while  the  number 
of  active  establishments  reporting  for  1899  was  only  23 
(or  10.6  per  cent)  more  than  the  number  reporting  for  1889." 
From  the  thirteenth  census  it  appears  that  the  amount  of 
coke  produced  increased  100.5  per  cent  from  1899  to  1909 ; 
the  value  of  all  products  in  the  industry,  156.9  per  cent; 
and  the  capital  employed,  317  per  cent ;  whereas  the  number 
of  establishments  reporting  increased  by  only  30.7  per  cent. 
This  is  typical  of  what  is  taking  place  in  an  increasing 
number  of  industries. 

Competition  of  small  producers  attained  its  maximum  in 
the  decade  between  1870  and  1880,  when  it  became  familiarly 
known  as  "  cut-throat  "  competition.  But  for  the  existence 
of  free  land,  mideveloped  resources,  and  the  constant  in- 
crease of  inventions,  widespread  disaster  must  have  resulted. 
Since  that  time  the  relative  number,  and  in  some  cases  the 
absolute  number,  of  competitors  has  decreased  in  a  consider- 
able part  of  the  industrial  field.  In  the  thirteenth  census  of 
manufactures,  for  1909,  a  classification  of  establishments  is 
made  on  the  basis  of  the  reported  value  of  their  annual 
product.  It  appears  that  43.8  per  cent  of  the  value  of  all 
manufactures  was  produced  in  establishments  of  the  highest 
class,  each  reporting  $1,000,000  or  more  a  year;  and  that 
82.2  per  cent  was  similarly  produced  in  the  two  highest 
classes,  each  reporting  an  annual  product  of  $100,000  or  more 
a  year.  In  the  same  way,  30.5  per  cent  of  all  employees  re- 
ported in  manufactures  were  employed  in  establishments  of 
the  highest  class,  and  74.3  per  cent  by  the  two  highest  classes 
combined.  And  both  the  highest  class  and  the  two  highest 
classes  combined  show  increased  percentages  for  1909  over 
1904,  both  for  value  of  product  and  for  number  of  employees. 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES  81 

In  the  years  from  1898  —  which  marked  the  close  of  the 
severe  industrial  depression  that  had  lasted  from  1893  — 
to  1907,  the  tendency  to  concentration  became  most  marked, 
many  of  our  greatest  industrial  combinations  dating  from 
this  period.  At  the  same  time,  and  undoubtedly  as  a 
result,  there  occurred  an  interesting  change  in  the  philos- 
ophy of  American  business  men.  Before,  they  had  all  given 
unquestioning  allegiance  to  the  inspiring  principle  that 
"  competition  is  the  life  of  trade."  With  the  organization 
of  the  "  billion-dollar  steel  corporation  "  and  other  mammoths 
of  the  same  class,  there  came  an  about-face,  and  in  recent 
years  many  great  industrial  managers  have  vied  with  the 
socialists  in  insisting  that  not  competition,  but  combina- 
tion or  cooperation,  is  the  life  of  trade.  We  shall  have 
occasion  later  to  consider  the  measure  of  truth  in  this  claim ; 
here  we  are  concerned  only  to  note  the  origin  of  this  in- 
teresting change  in  business  philosophy. 

Recently  the  movement  toward  large-scale  industry  has 
taken  on  another  phase.  In  addition  to  concentration  of 
industry,  we  are  now  having  a  rapidly  increasing  integror 
tion  of  industry.  Large  business  concerns  are  finding  it 
profitable  to  carry  on,  under  one  management,  several 
stages  of  production  that  formerly  represented  separate 
industries,  and  also  in  many  cases  other  closely  related  indus- 
tries. Thus  the  Standard  Oil  Company  is  a  great  producer 
of  crude  oil ;  carries  most  of  the  "crude"  of  the  country  to 
refineries  through  its  own  pipe  lines ;  makes  its  own  auxiliary 
materials  and  aids  to  marketing,  such  as  sulphuric  acid, 
boxes,  barrels,  cans,  etc. ;  produces  a  thousand  and  one  sorts 
of  kerosene,  gasolene,  lubricating  oils,  paraffin,  asphalt,  etc. ; 
and  carries  its  own  finished  products  to  home  and  foreign 
markets  through  its  own  agencies  of  distribution,  including 
a  great  fleet  of  tank  steamers. 


82       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Monopolies.  —  Concentration  of  industry  may  be  incom- 
plete or  complete.  Incomplete  concentration  resulting  from 
combination  Tnay  not  lessen  competition  at  all;  it  may  even 
increase  the  sharpness  and  bitterness  of  the  competition.  It 
simply  gives  business  into  the  hands  of  those  producers  who 
are  best  able  to  continue  it  under  the  vigorous  conditions 
which  existing  competition  imposes  upon  the  rivals.  But 
when  concentration  in  any  industry  is  complete,  we  have  the 
entire  industry  under  the  management  of  a  single  individual, 
partnership,  or  corporation.  When  such  a  state  of  things 
exists,  or  is  so  nearly  approached  that  a  single  unified  manage- 
ment can  exercise  control  over  the  supply,  and  hence  over 
the  price,  of  the  product,  we  have  a  monopoly. 

We  might  naturally  expect  that  where  the  tendency  to 
concentration  is  strongest,  as  in  the  United  States,  the 
tendency  to  complete  concentration,  or  monopoly,  would 
also  be  strongest,  and  American  experience  would  seem  to 
justify  the  expectation.  Thus  two  of  the  great  problems 
now  before  the  people  of  our  country  are  those  connected 
with  the  concentration  and  integration  of  industry,  which 
leads  to  the  so-called  trusts,  and  with  the  complete  con- 
centration of  an  industry,  which  is  monopoly.  It  is  partic- 
ularly in  the  class  of  so-called  natural  monopolies  that  the 
development  has  in  recent  times  been  most  rapid  and  most 
startling.  Natural  monopoUes  are  those  that  rest,  not  upon 
the  will  of  society,  but  upon  the  economic  characteristics  of 
the  business  itself.  Such,  for  instance,  are  all  the  monopolies 
of  transportation  and  communication.  The  reason  for  the 
unusual  development  of  the  monopoly  problem  in  our  own 
time  lies  in  the  fact  that  the  whole  transport  system  of  the 
world  has  been  developed  within  little  more  than  fifty  years. 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES  83 


11.   Social  Regulation  of  Competition  in  the  United 

States 

Labor  Legislation  in  the  United  States.  —  We  have  al- 
ready noted  and  explained  the  fact  that  the  misery  and 
degradation  of  the  wage-earning  classes,  which  in  England 
led  to  a  reaction  in  favor  of  an  active  policy  of  government, 
were  not  felt  so  quickly  nor  so  keenly  in  the  United  States. 
With  us,  therefore,  there  was  in  earlier  days  no  urgent  de- 
mand for  legislation  in  behalf  of  the  workers.  Similar  condi- 
tions, however,  led  in  the  end  to  like  results,  and  in  most  of 
the  commonwealths  of  the  American  Union  we  now  have  a 
considerable  body  of  factory  legislation  for  the  protection  of 
the  wage-earners  and  for  the  promotion  of  their  welfare. 
Massachusetts,  among  the  foremost  of  the  states  in  the 
extent  of  her  manufacturing  interests,  was  naturally  among 
the  earHest  to  pass  labor  laws.  The  spread  of  such  legis- 
lation in  our  country  illustrates  the  principles  which  we 
have  already  explained,  for  in  general  it  has  followed  the 
line  of  industrial  development  as  it  spread  from  New  England 
to  the  West  and  South. 

Within  recent  years,  however,  state  pride  and  a  quickened 
social  sense  have  led  many  relatively  non-industrial  states 
to  imitate  the  labor  codes  of  their  industrial  neighbors, 
and  a  gratifying  advance  has  marked  the  opening  years  of 
the  twentieth  century.  Even  so,  however,  the  American 
student  of  the  social  problem  has  sadly  to  admit  that  we 
have  become  laggards  in  the  forward  march  of  nations 
towards  a  higher  and  more  humane  civilization ;  that  our 
once  boasted  leadership  has  passed  from  us  to  other  lands. 
While  our  great  economic  resources  still  tempt  labor  as 
well  as  capital  from  abroad,  the  enticement  of  the  lure  is 


84       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

weakened  for  labor,  as  it  is  strengthened  for  capital,  by  our 
inadequate  attention  to  the  welfare  of  our  workers. 

Especially  backward  in  the  matter  of  labor  laws  are 
several  of  the  Southern  states,  in  which  capital  from  the 
northeastern  part  of  the  country,  and  particularly  from 
New  England,  has  been  largely  invested  during  the  last 
quarter  century.  It  is  found  that  all  those  states,  which 
to  a  certain  extent  compete  with  Massachusetts  and 
other  New  England  states  in  textile  manufactures,  repeat 
many  of  the  darkest  pages  of  early  English  experience. 
While  they  are  possibly  gaining  a  temporary  industrial 
advantage  over  the  older  state,  public  opinion  is  rapidly 
organizing  to  protest  against  a  temporary  industrial  ad- 
vantage gained  at  the  cost  of  the  permanent  welfare  of 
the  workmen  of  the  South  as  well  as  of  Massachusetts.  True, 
some  of  the  advantages  possessed  by  the  Southern  states  are 
derived  from  climate,  proximity  to  raw  material,  the  absence 
of  antiquated  machinery,  etc.  If,  with  good  labor  laws 
well  enforced,  these  advantages  are  not  offset  by  the  better 
labor  market  of  Massachusetts,  her  greater  accumulation 
of  specialized  capital,  with  lower  interest  charges,  her  lower 
freight  charges,  her  nearness  to  the  consumers'  markets,  her 
helpful  traditions  of  production,  etc.,  the  new  states  will 
confer  a  benefit  upon  society  by  producing  the  goods,  even 
though  it  be  at  a  serious  temporary  cost  to  the  old  New 
England  state.  Notwithstanding  many  peculiar  difficulties, 
the  South  has  already  begun  to  follow  England  and  Massa- 
chusetts in  regarding  higher  and  more  permanent  interests 
than  the  mere  increase  of  output,  and  this  movement  must 
continue. 

But  apart  from  state  legislation  we  are  to  be  assisted  by 
federal  legislation,  if  the  new  Federal  Child  Labor  Act, 
signed  by  President  Wilson  on  September  1,  1916,  is  finally 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES   85 

sustained  as  constitutional  by  our  courts  and  is  properly  en- 
forced. This  law,  hailed  as  a  new  Emancipation  Proclama- 
tion, prohibits  the  shipment  in  interstate  commerce  of  the 
products  of  mines,  quarries,  shops,  factories,  and  canneries  in 
which  child  labor  is  employed  contrary  to  the  provisions  of  the 
Federal  Child  Labor  Act.  These  provisions  are  that  chil- 
dren under  sixteen  years  of  age  shall  not  be  employed  in 
mines  and  quarries,  that  children  under  fourteen  years  of 
age  shall  not  be  employed  in  shops,  factories,  and  canneries, 
and  that  between  the  ages  of  fourteen  and  sixteen  they  shall 
not  be  employed  at  night  nor  for  more  than  eight  hours  a 
day.  This  law  is  epoch-making  in  the  history  of  social 
legislation  in  the  United  States. 

Legislation  against  Adulteration.  —  America  and  England 
have  also  differed  in  their  readiness  to  give  heed  to  the 
adulteration  of  goods  and  the  falsification  of  wares.  And 
yet  we  have  certainly  had  need  of  some  action  in  these 
matters.  Not  only  have  we  become  painfully  familiar  with 
goods  of  the  sort  that  unrestrained  competition  always  pro- 
duces, and  that  are  known  in  England  by  the  expressive 
term  "  cheap  and  nasty,"  but  we  have  also  with  us,  as 
commonly  as  anywhere  else  in  the  world,  adulterations  that 
menace  life  and  health.  The  fact  that  the  theory  of  non- 
interference has  never  been  so  completely  shattered  here  as 
in  England  by  the  pressure  of  labor  interests,  coupled  with 
the  fact  of  the  delicate  balance  of  authority  between  state 
and  Nation,  probably  accounts  in  considerable  measure  for 
our  general  reluctance  to  intrust  to  our  government  the 
duty  of  inspecting  wares.  Within  the  last  few  years  more 
serious  attention  has  been  given  to  the  matter,  the  Federal 
government  and  many  states  have  moved  rapidly  and  vigor- 
ously in  the  prevention  of  adulteration,  and  the  growing 
interest  in  economic  questions  is  likely  to  result  in  a  better 
realization  of  our  cooperative  power  and  duty. 


86        ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Social  Control  of  Monopoly.  —  The  question  of  the  right 
relation  of  organized  society  to  industry  has  nowhere  proved 
more  embarrassing  and  difficult  than  in  the  case  of  monop- 
ohes,  and  especially  of  the  great  class  of  monopolies  which 
we  have  called  natural.  Here,  even  more  than  elsewhere, 
it  has  been  brought  home  to  men  that  the  laissez-faire 
philosophy  and  practice  cannot  safely  be  accepted.  The 
history  of  attempts  to  control  these  monopoUes  is  long  and 
confusing,  but  we  may  distinguish  three  fairly  distinct 
methods:  attempts  to  enforce  competition,  public  control, 
and  public  ownership. 

1.  Attempts  to  Enforce  Competition.  —  When  the  monopoly 
problem  on  a  vast  scale  first  presented  itself,  society  was 
still  possessed  by  the  idea  of  the  beneficence  of  the  imiversal 
nile  of  self-interest.  It  was  natural,  therefore,  to  attempt 
to  enforce  competition  in  the  new  field  of  industry.  Rail- 
way charters  and  charters  for  municipal  service  corporations 
were  granted  freely,  even  recklessly,  in  the  belief  that  compe- 
tition would  thus  be  secured.  But  competition  cannot  exist 
where  monopoly  is  natural,  as  will  be  explained  in  a  later 
chapter.  The  whole  history  of  attempts  to  secure  such 
competition  is  a  history  of  failure.  A  single  illustration  may 
serve  our  purpose.  The  state  of  New  York  gave  a  railway 
charter  to  the  West  Shore  Company,  which  constructed  a 
line  parallel  to  that  of  the  New  York  Central.  In  granting 
the  charter,  the  state  attempted  to  enforce  real  and  perma- 
nent competition  by  stipulating  that  the  railway  should 
never  be  sold  to  its  rival.  Yet  after  a  few  years  of  dis- 
astrous rate  "  wars,"  the  new  road  was  leased  to  the  Central 
in  1885  for  475  years.  The  same  experience  has  been  re- 
peated, again  and  again,  as  often  as  the  experiment  has  been 
tried. 

2.  Public  Control.  —  The  second  method  of  solving  the 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES  87 

social  problem  involved  in  natural  monopolies  is  that  of 
public  control  or  regulation.  This  method  began  to  be 
tried  about  fifty  years  ago  with  the  rise  of  the  "  granger  " 
movement,  which  was  at  first  a  mere  unorganized  uprising 
of  farmers  against  railway  abuses,  but  which  later  developed 
into  an  organized  movement,  having  as  its  center  the  "  Order 
of  the  Patrons  of  Husbandry,"  —  commonly  known  as  the 
"  grangers,"  —  founded  in  1867.  The  political  influence  of 
this  body  forced  many  Middle  Western  states  to  pass  laws 
regulating  railway  rates  and  binding  the  roads  by  other  rules 
of  action.  Much  of  this  legislation  was  so  ill-considered  that 
it  was  soon  repealed,  and  the  movement  itself  was  thereby 
for  a  time  discredited.  But  much  of  it  was  well  founded, 
and  a  renewal  of  the  effort  resulted  in  the  creation  of  state 
and  federal  railway  commissions,  with  certain  powers  of 
supervision,  adjudication,  and  control.  The  opening  years 
of  the  twentieth  century  have  witnessed  a  further  advance 
in  public  regulation  of  public  service  monopolies.  It  is  only 
a  few  years  since  Mr.  Charles  E.  Hughes,  ex- Justice  of  the 
United  States  Supreme  Court,  then  Governor  of  New  York 
State,  after  an  unusually  bitter  struggle  with  the  leaders  of 
his  party,  succeeded  in  securing  for  his  state  the  law  creating 
PubUc  Service  Commissions  and  giving  to  them  a  really 
effective  control.  The  example  of  New  York  State  has 
been  widely  followed,  and  for  the  time  being  there  is  per- 
haps a  more  confident  hope  than  ever  before  that  society 
can  solve  the  problem  of  monopoly  through  administrative 
control,  while  leaving  ownership  and  management  in  private 
hands. 

This  growing  confidence  in  the  possibility  of  regulation  is 
reflected  in  the  law  passed  by  Congress  in  1914,  establishing 
a  Federal  Trade  Commission,  charged  with  the  duty  of 
regulating   trusts,  —  or    great    industrial   combinations,  — 


88       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

very  much  as  the  Interstate  Commerce  Commission  and  the 
various  state  PubHc  Service  Commissions  have  been  charged 
with  the  duty  of  regulating  railways  and  other  public  serv- 
ice monopolies. 

And  yet  it  must  be  admitted  that  the  policy  of  public 
control  has  hitherto  proved  diflficult  of  application,  not  only 
in  the  case  of  railways,  but  also  in  the  case  of  the  large  class 
of  municipal  natural  monopolies.  Wealthy  corporations, 
retaining  the  best  legal  talent,  have  shown  endless  ingenuity 
in  evasion,  and  great  power  in  retaliation,  as  is  abundantly 
shown  in  the  annual  reports  of  the  United  States  Interstate 
Commerce  Commission. 

3.  Public  Ownership.  —  The  great  diflficulties  in  the  way 
of  successfully  applying  either  of  the  first  two  methods  have 
led  a  considerable  proportion  of  our  people  to  look  with 
favor  upon  the  method  of  public  ownership  of  natural  monop- 
olies, with  or  without  government  management  of  the  busi- 
ness. In  the  case  of  municipal  waterworks,  the  practice 
already  obtains  very  generally.  An  increasing  number 
of  cities  are  taking  into  their  own  hands  other  forms  of 
municipal  service.  Technical  and  political  considerations 
make  it  quite  possible  that  a  given  city  may  wisely  own  one 
form  of  municipal  monopoly  and  at  the  same  time  refrain, 
with  equal  wisdom,  from  taking  over  others.  This  question 
will  be  further  considered  in  a  later  chapter.  At  this  point, 
therefore,  we  need  only  add  in  closing  that  the  solution  of  the 
monopoly  problem  certainly  lies  to-day  between  the  methods 
of  public  regulation  and  public  ownership. 

SUMMARY 

1.  In  the  United  States,  owing  to  the  absence  of  established  handi- 
crafts in  the  eighteenth  century  and  to  the  abundance  of 
free  land,  the  transition  to  the  industrial  stage  was  not  marked 
by  great  violence  or  suffering  in  the  case  of  the  workers. 


THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES  89 

2.  The  intensity  of  competition  in  the  United  States  has  been 

felt  more  keenly  by  the  manufacturers,  and  concentration 
of  industry  has  thus  been  hastened. 

3.  American  experience  confirms  that  of  England  in  condemning 

unrestrained  competition. 

4.  The  United  States  has  found  it  necessary  to  give  up  the  laissez- 

faire  poHcy  and  to  adopt  a  policy  of  social  regulation  of  labor, 
monopoly,  etc. 

5.  The    tendency    to    complete    concentration    of    industry,    or 

monopoly,  gives  rise  to  grave  social  problems. 

6.  Three  methods  of  solving  the  monopoly  problem  have  been 

tried :     enforced    competition,    public    control,    and    public 
ownership. 

QUESTIONS  FOR  RECITATION 

1.  Contrast  the  Industrial  Revolution  in  the  United  States  with 

the  same  change  in  England,   (a)  as  regards  the  workers; 
(6)  as  regards  employers. 

2.  What  has  been  the  effect  of  the  mobility  of  population  in  the 

United  States? 

3.  What   is   integration   of  industry?     Complete   concentration? 

Natural  monopoly? 

4.  Mention  some  of  the  ways  in  which  the  government  in  the 

United  States  regulates  competition. 

5.  Name  and  explain  the  different  experiments  in  attempting  to 

solve  the  monopoly  problem. 


QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  Can  you  think  of  any  economic,  social,  and  political  conditions 

in  the  American  colonies  that  would  naturally  give  the  laissez- 
faire  philosophy  an  exceptionally  strong  position  among  the 
people  of  our  country? 

2.  Has  the  constitution  (a)  of  the  United  States ;  (6)  of  your  state, 

any  traces  of  the  laissez-faire  philosophy? 

3.  Is  the  mobility  of  population  likely  to  continue  as  great  as  it 

has  been  ? 

4.  Is  a  tendency  to  concentration  observable  in  agriculture  in  the 

United  States?  in  any  other  country?  in  commerce?  in 
mining?  If  concentration  should  develop  throughout  the 
whole  of  industry,  can  you  predict  any  probable  poUtical 
and  social  consequences  ? 


90       ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

5.  When  was  the  United  States  Steel  Company  incorporated? 
In  what  state  ?  What  is  its  capitahzation  ?  Its  annual 
earnings?  What  illustrations  does  it  afford  of  concentra- 
tion?  of  integration? 

LITERATURE 

Bogart,  E.  L. :  Economic  History  of  the  United  States. 

Callender,  G.  S. :  Selections  from  the  Economic  History  of  the  United 

States. 
Coman,  Katherine :   The  Industrial  History  of  the  United  States. 
Ely,  R.  T. :    Monopolies  and  Trusts,  Ch.  V,  and  The  Evolution  of 

Industrial  Society,  pp.  58-66. 
Jenks,  J.  W. :    The  Trust  Problem. 
Johnson,  E.  R. :  American  Railway  Transportation. 
Kling,  W.  I. :    The  Wealth  and  Income  of  the  People  of  the    United 

States. 
Van  Hise,  C.  R. :    Concentration  and  Control:    A  Solution  of  the 

Trust  Problem  in  the  United  States. 
Wright,   C.   D. :     The   Industrial   Evolution   of  the    United   States, 

Pt.  II,  Ch.  XIV,  pp.  174-189. 


BOOK   III 

ECONOMIC   THEORY 

PART  I.    CONSUMPTION 

CHAPTER  I 
INTRODUCTORY 

Utilities  and  Goods 

We  have  studied  the  history  of  man's  efforts  to  get  a 
Hving,  and  the  fundamental  conditions  which  determine  all 
his  efforts  to  that  end.  We  have  now  to  study  analytically 
the  process  by  which  he  gets  his  living  to-day,  remembering 
that  the  process  is  conditioned  fundamentally,  and  that  those 
fundamental  conditions  have  their  roots  far  in  the  past. 

Reason  for  studying  Consumption  first.  —  When  we  in- 
quire why  men  display  what  we  call  economic  activity,  we 
discover  at  once  that  it  is  because  they  feel  wants  which  they 
aim  to  satisfy.  Most  immediately  connected  with  wants  in 
any  analysis  of  the  subject  is  the  satisfaction  of  them,  and 
therefore  it  is  not  illogical  to  study  first  of  all  that  branch  of 
the  subject  which  we  have  called  by  the  name  "  consump- 
tion." 

Definitions.  —  When  anything  has  the  power  of  satisfying 

human  wants,  we  say  that  it  is  a  good  thing,  or  that  it 

^possesses  utility.     In  economics,  these  words  "  good  "  and 

91 


92        ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

"  utility  "  are  also  made  to  apply  to  the  things  or  services 
themselves.  To  give  a  definition,  therefore,  we  may  say 
that  a  good  or  a  utility  is  anything  which  can  satisfy  a  human 
want.  And  here  we  must  pause  to  caution  the  student  that 
the  word  "  good  "  is  applied  to  any  such  thing  even  though 
the  thing  ministers  to  a  want  that  were  better  left  unsatisfied. 
The  idea  from  the  economic  point  of  view  is  simply  that  the 
thing  is  good  in  the  sense  of  being  adapted  to  the  want,  how- 
ever reprehensible  the  want  may  be.  Notice  that  this  defi- 
nition of  the  term  "  good  "  includes  not  merely  material 
things  such  as  food  and  clothes,  but  also  such  immaterial 
things  as  personal  services.  The  advice  of  a  physician  and  a 
new  invention  are  goods  that  we  desire  and  are  willing  to  pay 
for,  though  they  do  not  exist  in  any  physical  form.  Goods 
or  utilities,  then,  may  first  be  divided  into  the  two  great 
classes  of  (1)  material  things,  and  (2)  personal  services.  In 
the  last  analysis,  of  course,  all  goods  resolve  themselves  into 
"  services/'  either  of  human  beings,  or  of  other  material 
things. 

Free  Goods  and  Economic  Goods.  —  When  we  come  to 
analyze  goods  further,  we  find  that  some  of  them  are  given 
by  nature  in  such  abundance  that  all  of  us  may  have  our 
wants  for  them  satisfied  without  effort.  Thus,  air  is  a 
utility  of  the  first  importance;  but  in  all  ordinary  circum- 
stances it  is  so  abundant  that  we  can  satisfy  our  wants  for 
it  without  any  exertion.  All  such  goods  are  therefore  called 
free  goods. 

But  we  find  by  hard  experience  that  before  we  can  satisfy 
many  of  our  wants,  either  we  ourselves  must  Ihake  efforts, 
or  others  must  exert  themselves  for  us.  The  reason  is  that 
the  supply  of  such  utilities  is  limited  either  (1)  by  the  im- 
possibility of  increoMng  their  number  or  amount  at  all,  as  is 
the  case,  for  instance,  with  paintings  by  old  masters7~cJl 


UTILITIES  AND  GOODS  93 

(2)  by  the  necessity  of  labor  and  sacrifice  for  further  increase 
in  their  supply,  as  is  the  case  with  watches  and  houses,  and, 
indeed,  with  the  greater  number  of  things  with  which  our 
economic  Hfe  is  concerned. 

As  just  stated,  these  goods  as  a  rule  can  be  obtained  only 
by  human  exertion  or  sacrifice.  And  being  thus  obtained, 
they  can  be  exchanged  or  transferred  from  hand  to  hand 
by  those  who  possess  them.  Of  course,  many  goods  are 
of  such  a  nature  that  they  cannot  be  readily  transferred 
or  —  as  in  the  case  of  land  —  be  actually  transferred 
at  all.  In  such  cases,  transfer  of  title  takes  the  place  of 
actual  transfer  of  the  goods.  Again,  it  is  of  course  impos- 
sible for  one  man  to  transfer  to  another  any  special  ability 
that  he  may  possess.  But  the  services  which  such  special 
ability  may  enable  one  to  render  may  be  exchanged  for  the 
services  of  others  or  for  material  goods,  and  we  may  regard 
such  services  as  falling  in  the  same  class  with  the  other  goods 
we  have  been  describing.  All  such  goods  we  call  economic 
goods,  because  they  are  the  ones  that  man  spends  his  life  in 
acquiring,  and  because  the  wants  for  them  and  the  efforts 
and  sacrifices  made  in  obtaining  them  are  susceptible  of  such 
money  measurement  as  enables  them  to  be  the  subject  of 
scientific  analysis.  The  three  characteristics  of  economic 
goods,  then,  are  scarcity,  cost,  and  exchangeability.  To  sum 
the  matter  up  in  the  form  of  a  definition :  Economic  goods 
are  goods  which  are  so  limited  in  quantity  that  their  possession, 
on  the  one  hand,  regularly  requires  exertion  or  sacrifice,  and, 
on  the  other  hand,  gives  the  opportunity  of  transferring  or  ex- 
changing them. 

When  we  speak  of  economic  goods  Jaken  collectively  or  in  a 
body,  we  use  the  word  wealth,  whether  the  mass  of  su^h  goods 
be  great  or  small. 

Different  Sorts  of  Utility.  —  There  are  five  ways  in  which 


94       ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

material  goods  can  satisfy  our  wants.  In  the  first  place,  a 
good  satisfies  our  wants  by  reason  of  the  elements  or  sub- 
stance of  which  it  is  composed.  Thus,  coal  is  so  constituted 
that  under  certain  conditions  and  in  certain  relations  it  pro- 
duces heat.  This  utility  which  a  thing  possesses  by  reason  of 
the  elements  of  which  it  is  composed  we  call  (1)  elementary 
utility. 

But  the  coal  as  it  is  in  the  mine  is  not  ready  to  satisfy 
man's  wants.  It  must  first  be  broken  up  by  the  miner  into 
such  fragments  as  are  convenient  for  man's  purposes.  Its 
form  must  be  changed.  This  utility  which  a  good  has  by 
reason  of  the  form  in  which  it  exists  we  call  (2)  form  utility. 
Manufacturing  gives  as  its  result  form  utilities,  and  we 
generally  think  of  manufactured  products  when  we  speak  of 
this  kind  of  utilities. 

When  the  coal  has  been  changed  by  labor  into  a  form 
fitted  for  human  uses,  it  is  still  necessary  to  convey  it  to 
those  who  are  to  use  it.  The  utility  lohich  a  good  has  by 
reason  of  being  in  a  place  convenient  to  the  user  we  call  (3)  place 
utility. 

Next,  this  coal,  which  is  made  up  of  elements  fitting  it  for 
human  use,  which  has  had  its  form  changed  by  the  miner, 
and  which  has  now  been  transported  to  a  place  convenient 
for  its  consumption,  is  kept  until  the  time  when  it  is  to  be 
used.  The  utility  which  a  good  has  by  reason  of  its  beitbg — 
present  at  a  time  convenient  to  the  consumer  we  call  (4)  time 
utility. 

Finally,  by  an  act  of  exchange,  the  coal  passes  from  the 
ownership  or  possession  of  the  dealer  to  a  consumer.  The 
utility  which  a  thing  has  by  reason  of  being  in  the  possession 
of  one  person  rather  than  of  another  is  called  (5)  possession 
utility.  This  may  perhaps  be  better  understood  by  consider- 
ing a  "  swap,"  an  act  of  simple  barter.     When  two  boys  swap 


UTILITIES  AND  GOODS  95 

jackknives,  it  is  possible  for  both  knives  to  have  greater 
utility  for  their  new  owners  than  they  had  before.  The  new 
and  added  utility  resulting  merely  from  change  of  possession 
is  possession  utility. 

Elementary  utility,  form  utility,  place  utility,  time  utility, 
and  possession  utility :  these,  in  their  logical  order,  are  all 
the  sorts  of  utility  that  any  material  goods  ever  do  or  can 
have.  Goods  about  to  be  consumed  of  course  have  all  of 
these  utilities ;  but  in  the  case  of  any  particular  commodity 
some  one  utility  is  likely  to  be  of  special  importance.  Thus, 
ice  in  summer  has  as  its  most  conspicuous  utility  that  of  time. 
In  the  same  way,  great  place  utility  is  added  to  tea  when  it  is 
carried  from  Japan  or  Ceylon  to  the  consumer  in  an  Ameri- 
can town. 

Wealth  Consumption.  —  Man  satisfies  his  wants  by  the 
enjoyment  of  these  utilities.  In  many  cases  enjoyment  of 
such  utilities  involves  the  destruction  of  the  physical  goods. 
But  there  are  other  things  whose  utilities  are  not  destroyed 
by  the  user,  but  by  natural  forces.  In  such  cases,  the  de- 
struction is  usually  gradual  and  slow.  Thus,  a  house  fur- 
nishes its  utilities  to  the  user  over  a  long  period  of  years. 
The  direct  satisfaction  of  human  wants  by  the  enjoyment  of  the 
utilities  in  goods  is' called  consumption.  When  goods  afford 
such  direct  satisfaction  only  in  a  single  act  of  enjoyment, 
they  are  called  perishable  goods.  Such,  for  instance,  are  coal 
and  food.  But  a  house,  a  book,  or  a  carriage  affords  satis- 
faction of  human  wants  in  repeated  acts  of  using.  To  take 
an  extreme  instance,  land  may  be  made  to  afford  satisfaction 
of  human  wants  through  all  time.  These  are  durable  goods. 
Defining,  we  may  say  that  perishable  goods  are  those  that  lose 
their  utilities  in  a  single  satisfaction  of  human  wants;  durable 
goods  are  those  that  afford  repeated  satisfaction  of  human  wants. 

Productive    Consumption.  —  Earlier    economists    usually 


96       ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

included  under  the  name  consumption  a  destruction  of  utili- 
ties designed  to  result  in  the  creation  of  new  and  greater 
utilities.  Thus,  coal,  when  used  in  the  engines  of  a  factory, 
was  said  to  be  consumed  productively.  If  we  were  to  call 
such  consumption  productive  consumptwrij  we  should  have  to 
use  some  distinguishing  word  in  referring  to  a  destruction  of 
utilities  for  the  direct  satisfaction  of  human  wants.  The  ex- 
pression adopted  for  this  purpose  was  final  consumption.  But 
since  productive  consumption  is  only  a  part  of  the  process  of 
production,  we  may  fairly  confine  the  use  of  the  word  "  con- 
sumption "  to  the  final  and  immediate  satisfaction  of  human 
wants  by  the  enjoyment  of  the  utilities  afforded  by  goods. 
What  economists  once  called  productive  consumption,  there- 
fore, we  shall  call  a  part  of  production. 

Relation  of  Consumption  to  Production.  —  We  must,  for 
scientific  reasons,  mark  somew^here  a  distinction  between  con- 
sumption and  production,  although,  as  appears  above,  the  two 
often  shade  into  each  other.  Consumption  and  production 
are  correlative.  Consumption  furnishes  the  motive  to  pro- 
duction. Production  affords  materials  and  services  for  con- 
sumption. Consumption  makes  production  necessary  at  the 
same  time  that  it  makes  production  possible.  To  sum  up  in 
a  word,  consumption  is  the  end  and  condition  of  production, 
and  of  all  economic  activity;  production  is  the  means  of 
consumption. 

SUMMARY 

1.  Since  want  satisfaction  forms  the  motive  to  all  economic  ac- 

tivity, consumption  may  properly  be  made  the  first  division 
of  economic  theory. 

2.  Want  satisfiers  are  called  utilities  or  goods. 

3.  Free  goods  are  unlimited  in  quantity  and  cost  us  nothing; 

economic  goods  require  economic  activity  in  their  getting 
and  using. 


UTILITIES  AND  GOODS  97 

4.  There  are  five  sorts  of  utility:   elementary,  form,  place,  time, 

and  possession. 

5.  Consumption  is  the  use  of  goods  in  the  direct  satisfaction  of 

human  wants. 

6.  Consumption  is  the  end  and  means  of  production ;   production 

is  the  means  of  consumption. 

QUESTIONS  FOR  RECITATION 

1.  Why  is  consumption  first  studied? 

2.  What  is  a  good  or  utiUty?     Use  each  word  in  two  sentences 

to  show  the  difference  between  the  technical  economic  use 
and  the  non-technical. 

3.  Give  illustrations  of  free  goods ;   of  economic  goods. 

4.  Define  elementary  utiUty;    form  utility;    place  utility;    time 

utility ;  possession  utility. 

QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  Is  air  ever  an  economic  good?     Sunshine?     Is  water  ever  a 

free  good  ? 

2.  Is  the  farmer  the  only  producer? 

3.  Is  the  name  consumption  to  be  applied  to  the  use  of  com  in 

fattening  hogs?  Is  the  wearing  out  of  a  suit  of  clothes  by 
a  workman  consumption  or  a  part  of  the  process  of  produc- 
tion ?     If  workers  are  not  consumers,  who  can  be  consumers  ? 

4.  Give  examples  of  elementary,  form,  place,  time,  and  possession 

utihties. 

5.  Give  examples  of  perishable  and  of  durable  goods. 

LITERATURE 

Devine,  E.  T. :  Economics,  Ch.  V,  pp.  73-78. 
Fetter,  F.  A. :   Principles  of  Economics. 
Patten,  S.  N. :   The  Consumption  of  Wealth. 


CHAPTER  II 
THE  LAW  OF  DIMINISHING  UTILITY 

Illustrations  of  the  Law.  —  The  wants  of  men  are  innu- 
merable and,  considered  as  a  whole,  are  never  satisfied. 
There  seems  to  be  no  limit  to  the  variety  of  things  desired. 
But  if  we  single  out  any  one  commodity,  we  find  that  our 
desire  for  it  is  limited.  We  have  all  heard  of  the  king  who 
wanted  gold  and  who  got  so  much  that  he  finally  loathed  the 
sight  of  it.  The  story  of  King  Midas  is  but  an  illustration 
of  what  the  economists  call  the  law  of  diminishing  utility  or 
the  law  of  satiable  demand.  Let  us  consider  the  case  of  a 
desert  traveler,  who,  having  long  before  exhausted  his  supply 
of  water,  comes  upon  an  oasis  with. a  cooling  spring.  The 
first  cup  of  water  may  save  his  life,  and  would  therefore  have 
a  utility  which  we  may  call  absolute.  A  second  cup  may  still 
have  a  very  high  degree  of  utility ;  but  if  we  suppose  him  to 
continue  the  drinking,  we  know  that  the  later  additions  to 
his  satisfaction  will  gradually  grow  less  and  that  he  cannot 
proceed  without  coming  to  a  point  where  any  further  eon- 
sumption  will  cause  not  pleasure  but  pain. 

This  is  illustrated  graphically  by  the  figures  on  page  99. 

In  the  figure,  let  the  equal  spaces  1,  2,  3,  4,  5,  6,  7  on  the 
line  OX  represent  equal  portions  of  water,  and  let  the  per- 
pendicular lines  represent  the  height  to  which  satisfaction 
rises  in  drinking  the  respective  portions.  Then  the  parallelo- 
grams would  represent  the  total  satisfaction  derived  from 

98 


THE   LAW  OF   DIMINISHING    UTILITY 


99 


the  successive  acts  of  consumption.  It  will  be  noticed  that 
the  first  parallelogram  is  left  open  at  the  top.  This  is  be- 
cause in  the  example  the  utility  of  the  first  cup 


/i 


a  of  water,  since  it  saved  life,  is  not  susceptible  of 

measurement.     The  line  at  the  right,   therefore, 

6  is    in    such   a  case  to  be  thought  of  as  a 

continuing  line  rather  than  as  terminating 

at  a. 

If  now  we  think  of  the  succes- 

"  sive  portions — or  increments — 

^  of  the  water  as  very  small, 

—  mouthfuls,  for  instance, 

our    figure    would 

have    to    be 

-jrdrawn      as 

■I  2  3  4  5  6  7  8 

follows  :  — 
Here,  as  before,  the  utility  of  the  first  water  consumed  is 
absolute,  and  therefore  the  curved  line  AB  is  represented 
n   u  as  not  touching  the  perpendicular  OY  in  any  point. 
\     The  different  increments  consumed  are  to  be  thought 
of  as  points  along  the  line  OX,  and  the  satisfaction 
derived  from  any  increment,  as  m,  is  measured  by 
a  perpendicular,  as  mn,  cutting  the  curve  of 
diminishing  utility.     The  curve  in  this  case  cuts 
the  horizontal  OX  in  the  point  B,  repre- 
senting  the   point   at    which    utility 
from   the   water   ceases,  and  disu- 
I        \       tility   would  ^begin  should  con- 
sumption continue. 

,     With      the 


^  figures  and  ex- 

ample clearly  in  mind,  let  us  now  consider  some  of  the  particu- 
lars.   Each  unit  of  the  commodity  consumed  is  called  an 


100      ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

increment  of  supply  or  an  increment  of  consumption.  The 
utility  of  the  first  unit,  which  in  this  case  is  absolute,  is 
called  the  initial  utility.  If  the  stock  be  thought  of  as  cut 
off  at  any  point  along  the  OX  axis,  the  utility  of  the  last  unit 
is  the  marginal  utility.  Thus  mn  measures  the  marginal 
utility  of  stock  Ovi.  As  consumption  or  stock  increases  along 
OX,  marginal  utility  falls.  Thus  from  the  point  of  view  of 
progressive  acquisition  or  consumption  of  any  good,  we  may 
define  marginal  utility  as  the  utility  of  the  last  unit  acquired 
or  consumed.  Instead  of  the  term  marginal  utility,  some 
writers  use  the  term  final  utility,  and  others,  effective 
utility. 

The  total  utility  is  the  sum  of  the  utilities  of  all  the  units  of 
the  stock.  Note  well,  however,  that  the  total  utility  is  not  the 
marginal  utility  multiplied  by  the  number  of  units.  It 
should  rather  be  thought  of  as  equal  to  the  suffering  or  m- 
convenience  that  would  be  caused  by  withdrawing  all  the 
units  one  after  the  other.  Precisely  because  of  the  facts 
summed  up  in  the  law  of  diminishing  utility,  total  utility  is 
always  much  greater  than  the  marginal  utility  multiplied  by 
the  number  of  units. 

But  the  law  we  are  studying  is  of  wider  application  than 
to  the  mere  case  of  consumption.  It  applies  as  well  to 
possession.  Whenever  we  have  a  stock  of  any  conunodity, 
we  impute  a  utility  to  the  commodity,  even  when  we  are  not 
actually  consuming  it.  The  law  applies  therefore  to  the 
utility  of  the  commodity  whether  we  are  consuming  it  or  are 
retaining  the  power  to  consume  it  at  some  future  time.  Note, 
however,  that  in  the  case  of  possession,  as  compared  with 
actual  consumption,  the  marginal  utility  of  any  given  stock 
will  he  the  utility  of  any  unit  or  increment  of  that  particular  \ 
stock,  since  the  units  or  increments  are  to  be  regarded  a 
physically  indistinguishable.    Thus  the  utility  of  any  ton  ^ 


THE  LAW  OF   DIMINISm^G    U'nV^T$\\  ';  JlOX , 

coal  in  my  cellar  is  the  same  as  that  of  any  other' ton  in  the 
same  stock;  but  the  utility  of  a  ton  in  a  stock  of  five*  tons  is 
in  any  given  circumstances  greater  than  the  utility  of  a  ton 
in  a  stock  of  six  tons  or  ten  tons. 

Formal  Statement  of  the  Law.  —  We  are  now  prepared  foi* 
a  formal  statement  of  the  important  economic  law^^diminigh- 
ing  utility.  It  is  asJoUows :  At  any  given  time  the  marginal 
utility  of  any  commodity  to  its  owner  decreases  with  every  in- 
crease in  the  stock  possessed  or  consumed. 

Limitation.  —  Notice  that  this  statement  of  the  law  con- 
tains the  qualification  at  any  given  time.  The  importance 
of  this  qualification  becomes  evident  when  we  return  to  a 
consideration  of  our  illustration.  We  know  that  when  the 
utility  of  water  has  fallen  to  zero,  it  needs  not  long  to  wait 
before  the  satisfaction  to  be  derived  from  consumption  again 
becomes  keen.  With  the  consumption  or  possession  of  some 
things,  the  importance  of  the  qualification  becomes  even 
greater.  A  boy  finds  that  any  clothing  beyond  a  very  small 
amount  has  a  low  added  utility  for  him.  But  as  he  grows 
into  young  manhood,  his  wants  change  so  far  that  a  much 
larger  supply  of  clothes  has  as  great  a  marginal  utility  as  his 
slender  stock  had  before.  Whenever  different  times  are 
considered,  therefore,  we  must  make  complete  allowance  for 
the  change  of  wants  in  the  interval. 

The  Case  of  Money.  —  With  this  in  mind,  we  may  say 
that  the  law  of  diminishing  utility  applies  to  money  as  to  all 
other  goods,  although  the  rate  of  diminishing  utility  is  much 
slower,  because  money  represents  geiienaJU^ttfehasiag-^Q^Ker, 
and  pejaa^^  v^ljgix  in  consumption.  With  variety  in  con- 
sumption, as  we  all  know  from  experience,  satiety  is  reached 
more  slowly  than  without  it.  Nevertheless,  at  any  given 
time,  the  hundredth  dollar  of  one's  stock  has  a  lower 
utility    than    the    ninety-ninth    or    any    other    preceding 


*'VifZ':  JSL^^l^nTAHYP-niNCIPLES  OF  ECONOMICS 

one.  Thus  it  follovvs  that  to  a  rich  man,  other  things 
being  equudy  money  has  a  less  marginal  utility  than  to  a  poor 
man. 

SUMMARY 

1.  The  law  of  diminishing  utihty  explains  how  increasing  a  stock 

of  goods  means  decreasing  the  utility  per  unit  of  the  stock. 

2.  Initial  utility  is  the  utility  of  the  first  unit;    marginal  utility, 

the  utility  of  the  last  unit,  the  stock  being  thought  of  as 
gradually  increasing. 

3.  The  law  of  diminishing  utility  applies  unquahfiedly  only  at  a 

particular  moment  of  time. 

4.  The  law  of  diminishing  utihty  appUes  to  money  as  to  other 

commodities. 

QUESTIONS  FOR  RECITATION 

1.  How  great  is  the  marginal  utility  of  air  under  ordinary  circum- 

stances?   Why? 

2.  How  does  the  law  of  diminishing  utility  apply  when  the  con- 

sumption of  commodities  is  carried  beyond  the  point  of  zero 
utihty?     Illustrate  by  diagram. 

3.  Give  illustrations  of  the  importance  of  the  qualifying  phrase 

"at  any  given  time." 

4.  What  significance  has  the  law  as  bearing  upon  the  comparative 

condition  of  the  rich  and  the  poor? 


QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  Does  the  marginal  utility  of  all  commodities  decrease  at  the 

same  rate?  Does  the  marginal  utility  of  any  commodity 
decrease  at  the  same  rate  for  all  persons  ?  Give  illustrations 
and  draw  diagrams  to  represent  differences. 

2.  Is  the  marginal  utihty  of  a  dollar  necessarily  less  for  any  par- 

ticular rich  man  than  for  any  particular  poor  man  ? 

3.  Distinguish  between  flowers  and  weeds  in  terms  of  the  law  of 

diminishing  utihty.     Draw  to  represent  the  distinction. 

4.  Can  you  think  of  any  tales  or  proverbs  that  illustrate  the  sig- 

nificance of  the  law  of  diminishing  utihty  ? 


THE   LAW   OF   DIMINISHING    UTILITY  103 


LITERATURE 

See  preceding  chapter.     Also : 

Clark,  J.  B. :   Distribution  of  Wealth,  Ch.  XIV,  pp.  209-213. 

Cunyinghame,  H.  H. :   Geometrical  Political  Economy. 

Devine,  E.  T. :  Economics,  Ch.  V,  pp.  8&-92. 

Marshall,  A. :   Principles  of  Economics,  Bk.  Ill,  Ch.  Ill,  §§  1-4. 


CHAPTER  III 

DEMAND 

The  Economic  Order  of  Consumption.  —  It  follows  from 
the  law  of  diminishing  utility  that  men  in  satisfying  their 
wants  consume  commodities  in  a  fairly  regular  order.  So 
far  as  they  consume  things  to  the  best  advantage,  their  con- 
sumption is  based  upon  a  balancing  of  these  two  considera- 
tions, —  the  utility  of  the  goods,  and  the  cost  of  procuring  them. 
Therefore,  in  deciding  what  wants  they  will  first  satisfy,  they 
mil  choose  those  commodities  which  promise  the  greatest  sur- 
plus of  utility  over  cost. 

To  make  this  clearer  let  us  take  a  detailed  example.  Suppose 
a  boy  with  twenty-five  cents  to  spend  standing  before  a  booth  at 
a  fair,  and  bent  on  satisfying  a  want  for  goods  there  displayed. 
If  peanuts  are  five  cents  a  pint,  it  may  be  that  his  liking  for  them 
will  be  great  enough  to  cause  him  to  make  a  pint  of  them  his  first 
purchase.  But  he  knows  that  a  second  ''^f)int  will  satisfy  a  want 
less  keen  than  is  satisfied  by  the  first.  We  may  imagine  him,  then, 
spending  his  second  nickel  on  popcorn.  In  the  same  way,  it  may 
be;  a  first  glass  of  lemonade  will  give  him  greater  enjoyment  than 
would  a  second  pint  of  peanuts  or  a  second  bag  of  popcorn.  It  is 
possible  that  he  has  no  strong  desire  for  the  other  goods  displayed, 
and  that  he. can  get  greater  satisfaction  from  a  second  pint  of 
peanuts  than  from  anything  else  that  he  could  purchase,  although 
they  will  afford  less  enjoyment  than  he  derives  from  either  the 
popcorn  or  the  lemonade  he  has  bought.  Again,  it  is  quite  possible 
that  he  will  like  a  second  glass  of  lemonade  better  than  a  third 
pint  of  peanuts  or  even  a  second  bag  of  popcorn,  because  the  action 
of  the  law  of  diminishing  utility  is  more  rapid  in  his  consumption 

104 


DEMAND 


105 


of  popcorn  than  in  his  consumption  of  lemonade.  Now  the  boy 
has  purchased  with  his  five  nickels  two  pints  of  peanuts,  one  bag 
of  popcorn,  and  two  glasses  of  lemonade.  The  case  is  the  same 
whether  he  buys  them  all  at  the  same  time  or  distributes  his  pur- 
chases throughout  an  afternoon.  He  makes  his  purchases  accord- 
ing to  his  judgment  as  to  their  varying  utility  in  such  a  way  that 
he  will  receive  the  maximum  enjoyment  from  his  expenditure. 

Illustration  by  Diagram.  —  Let  us  illustrate  this  as  before  by  a 
diagram : 


(L- 


Oj^afi 


J- 


I 

I 


-L^ 


0" 


^ 


u 


Fia.  1 


Fig.  2 


1-6' 


I 1 


I 


'    i    '    l-'- 


a 

s^^^ .1'- 

f—l 

I         1 

i     i    h""! 

-S?*  0' 

1 1  2 1  3 1 .  r--,_5__ 

X' 


Fig. 


Fig.  4 


In  these  figures  let  successive  units  of  the  respective  goods  be 
measured  by  distance  from  0  on  the  OX  axis.  Let  the  parallelo- 
grams represent  the  satisfaction  derived  from  the  consumption  of 
the  different  units.  It  will  be  noticed  that  the  utility  of  the  first 
unit  is  greatest  in  the  first  diagram,  and  that  it  becomes  less  in 
each  succeeding  figure,  but  that  the  utility  diminishes  more  slowly 
in  Figure  3  than  in  Figure  2.     Now  let  the  price  of  each  unit  b© 


I 

106     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

measured  by  the  distance  between  OX  and  ah  in  each  figure,  since 
this  is  the  same  in  all  cases.  In  the  diagrams  it  is  evident  that 
purchase  will  first  be  made  of  the  commodity  represented  in  Figure\ 
1,  since  the  surplus  of  satisfaction  over  cost  is  greatest  in  that 
case,  this  surplus  being  measured  by  the  parallelogram  az,  which 
is  larger  than  any  of  the  corresponding  parallelograms  m,  n,  r,  s. 
The  parallelogram  n,  which  represents  the  surplus  of  utility  over 
cost  of  the  first  unit  of  the  second  commodity,  —  in  our  illustration, 
popcorn,  —  is  greater  than  the  parallelogram  m,  which  represents 
the  surplus  of  utihty  from  a  second  unit  of  the  first  commod- 
ity, and  is  also  greater  than  the  parallelogram  r,  which  repre- 
sents the  surplus  utihty  from  a  first  unit  of  the  third  commodity, 
—  in  this  case,  lemonade.  It  will,  therefore,  represent  the  second 
purchase.  In  the  same  way  r,  being  next  in  size,  represents  the 
third  purchase;  m,  the  fourth;  and  s,  the  fifth.  Notice  that 
while  the  first  unit  of  the  second  commodity  affords  a  surplus,  the 
second  does  not.  Again,  notice  Figure  4,  which  represents  some 
commodity  that  the  boy  is  not  tempted  to  purchase  with  the  stock 
of  money  in  his  possession. 

It  will  be  interesting  and  valuable  practice  for  the  student  to 
vary  these  figures  to  represent  different  suppositions  regarding 
consumption,  and  to  carry  the  process  one  step  farther  by  suppos- 
ing the  units  of  the  conmiodity  to  be  so  small  that  the  diminish- 
ing utihty  will  be  represented  by  a  curved  hue  instead  of  by  the 
broken  hnes  that  form  the  top  and  part  of  the  right  side  of  the 
parallelograms  in  our  illustration.  Another  variation  might  well 
be  to  have  the  costs  vary  from  commodity  to  commodity. 

We  are  now  prepared  for  a  formal  statement  of  the  law  vf 
the  economic  order  of  consumption.  So  far  as  commodities 
are  pm*chased  and  consumed  rationally  and  economically, 
choice  is  in  every  case  determined  by  the  amount  of  the  surpltis 
of  utility  over  cost. 

The  Law  of  Substitution,  Indifference,  or  Equi-Marginal 
Return.  —  To  this  law  there  is  a  corollary,  which  is  also  the 
application  to  the  field  of  consumption  of  the  more  general 
economic  law  variously  known  as  the  law  of  substitution,  of 
indifference,  or  of  equi-marginal  returns.  As  applied  to  con- 
sumption this  law  is  that  choice  is  determined  by  the  desire  to 


DEMAND  107 

make  marginal  utilities  equal  in  all  fields  of  consumption,  reck- 
oning these  marginal  utilities  with  respect  to  a  common  unit  of 
expenditure.  Some  goods,  to  be  sure,  are  of  such  a  charac- 
ter as  to  make  any  nice  balancing  of  satisfaction  difficult 
or  impossible.  There  is  so  great  a  difference  in  the  price  of 
cameras  and  automobiles  that  I  may  satisfy  my  want  for 
the  one  much  more  fully  than  my  want  for  the  other ;  though 
even  in  this  case  it  must  be  remembered  that  I  can  achieve 
a  certain  satisfaction  of  my  v/ant  for  automobiles  without 
buying  one  outright.  But  in  the  case  of  most  sorts  of  goods 
it  is  possible  to  buy  greater  or  smaller  quantities  at  will  and 
at  corresponding  gradation  of  expenditure.  And  in  the  case 
of  such  goods  it  is  obvious  that  rational  expenditure  will  be 
so  adjusted  as  to  make  the  marginal  utilities  equal  in  all  lines 
of  consumption. 

How  Economic  Importance  is  determined.  —  Each  con- 
sumer estimates  the  economic  importance  of  any  commodity, 
not  upon  th£_basis  of  its  tnta]  ujaU^^  but  upon  the  basis  of 
its  marginal  utility.  In  other  words,  its  importance  is 
measured,  not  by  the  total  amount  of  inconvenience  or 
suffering  that  would  result  from  entire  deprivation  of  the 
given  stock,  but  by  the  keenness  of  the  desire  or  want  that 
he  would  feel  if  deprived  of  any  portion  of  the  stock.  If  I 
were  where  I  could  not  make  any  purchases  of  goods,  nor 
add  to  my  stock  in  any  way  for  a  considerable  time,  and  if 
I  had  in  addition  to  other  goods  fifty  barrels  of  flour  and  only 
three  pounds  of  sugar,  I  should  probably  husband  the  sugar 
more  carefully  than  the  flour.  In  other  words,  I  should  cal- 
culate that  with  the  existing  stocks  a  pound  of  sugar  had  a 
greater  economic  importance  for  me  than  a  pound  of  flour. 
If,  however,  instead  of  the  greater  quantity  of  flour,  I  had 
so  little  that  ordinary  consumption  would  use  it  up  before 
the  stock  could  be  replenished,  I  should  attach  the  greater 


108      ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

economic  importance  to  the  flour  instead  of  to  the  sugar. 
In  either  case  my  reason  would  be  the  same.  In  the  first 
case  sugar  would  have  a  greater  marginal  utility  than  flour, 
because  diminution  in  its  supply  would  leave  me  with  an 
unsatisfied  want  keener  than  would  follow  from  an  equal 
diminution  in  the  stock  of  flour.  But  in  the  second  case 
the  flour  would  have  the  greater  marginal  utility,  since  a 
decrease  in  its  supply  would  involve  actual  hunger  before 
the  stock  could  be  replenished. 

It  is  instructive  to  compare  the  relation  between  the  mar- 
ginal utilities  of  two  commodities  with  the  relation  between 
their  total  utilities.  Thus,  a  pound  of  gold  has  a  greater 
economic  importance  than  a  pound  of  iron,  though  the  w^orld 
would  probably  suffer  more  from  the  loss  of  all  its  iron  than 
from  the  loss  of  all  its  gold.  The  same  contrast  is  much 
more  certainly  and  obviously  true  of  diamonds  and  coal. 

The  Laws  of  Demand 

We  have  already  explained  that  the  study  of  human  wants 
is  directly  connected  with  the  study  of  consumption,  and 
that  the  study  of  consumption  leads  to  the  study  of  demand. 
But  we  must  note  that  a  want  for  anything  is  notjthe  same 
thing  as  a  demand ^fojuit^^  "If  wishes  were  horses,  then 
beggars  might  ride."  In  order  that  there  may  be  a  demand 
for  a  thing,  there  mustJifi-notonly  a  desire  for  it,  but  also 
the  willingness  and  the  abihty  to  offer  for  it  some  sacrifice. 
In  other  words,  to  speak  in  the  language  of  everyday  life, 
we  must  not  simply  want  the  thing,  but  we  must  want  it 
enough  to  pay  for  it.  It  must  be  remembered,  therefore, 
that  in  economics,  demand  means  desire  backed  up  by  means 
or  pvrchasing  power. 

But  in  addition  to  this  definition  of  the  real  meaning  of 


DEMAND  109 

the  word  "  demand  "  in  economics,  we  need  a  definite  way 
of  measuring  its  intensity.  Such  a  method  of  measurement 
is  found  in  the  number  of  units  of  any  commodity  which 
will  he  purchased  at  a  given  price.  If  a  table  be  constructed 
of  the  different  quantities  of  a  commodity  which  would  be 
purchased  at  different  prices  at  any  given  time,  such  a  table 
will  describe  what  economists  speak  of  as  the  state  of  demand 
for  the  commodity.  If  to-day  the  people  of  a  certain  com- 
munity are  willing  to  buy 

100  bushels  of  apples  at  $2.00  per  bushel, 
300  "  "  "  "  $1.00  "  "  , 
500       "       "      "       "  $0.75    "        "     , 

this  list  or  table,  we  say,  shows  the  present  state  of  demand 

for  apples  in  the  community. 

The  demand  for  a  commodity  is  said  to  increase,  and  can 
only  then  properly  be  said  to  increase,  when  the  quantity  that 
will  he  taken  at  a  given  price  increases.  There  is  perhaps  no 
more  frequent  mistake  in  economic  reasoning  than  that  of 
assuming  that  demand  for  a  commodity  has  increased  or 
decreased  because  the  commodity  is  actually  selling  at  a 
higher  or  lower  price  than  before.  When  the  price  rises,  it 
may  indeed  be  because  of  an  increase  of  demand  for  the  same 
quantity  or  jUm  of  the  commodity ;  but  on  the  other  hand 
it  may  be  because,  with  no  change  in  demand,  the  quantity 
on  the  market,  or  the  flow  of  commodity  into  the  market, 
has  lessened.  From  this  it  follows  that  there  is  a  difference 
between  demand  and  quantity  demanded. 

It  is  usual  in  treatises  on  economics  to  include  a  statement 
of  the  law  or  laws  of  demand,  substantially  as  they  are  given 
below.  Strictly  speaking,  however,  only  the  first  and  third 
are  laws  of  demand,  the  second  being  rather  a  law^  of  the 
quantity  demanded,  as  has  been  explained  above. 


110     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

1 .  The  Quantity  Demanded  Varies  Directly  with  the  Marginal 
Utility,  —  Suppose,  in  the  first  place,  that  the  price  of  a 

certain  quality  of  tea  remains  during  a  certain  period  at 
fifty  cents  the  pound,  and  that  during  the  same  p>eriod  the 
wealth  of  the  consumers  also  remains  the  same.  Then  it  is 
evident  that  if  the  public  taste  for  any  reason  changes  in 
such  a  way  that  the  marginal  utility  of  any  amount  or  flow 
of  tea  becomes  less  or  greater,  the  demand  will  fall  off  or  in- 
crease to  correspond.  Note,  however,  that  the  change  in 
demand  is  not  necessarily,  or  even  usually,  exactly  propor- 
tioned to  the  change  in  marginal  utility. 

2.  The  Quantity  Demanded  Varies  Inversely  ivith  the  Price, 
— Again,  suppose  that  the  wealth  of  consumers  remains  the 
same,  and  that  there  is  no  change  in  the  marginal  utility  of 
any  quantity  or  flow  of  the  commodity.     Then  it  is  evident 
that  the  amount  taken  will  be  greater  when  the  price  is  low 
and  smaller  when  the  price  rises.     The  relation  between  price  f 
changes  and  resulting  changes  in  quantity  demanded  varies 
with  different  commodities.     Thus,  in  the  consumption  of  ' 
wheat,  for  instance,  while  it  makes  a  difference  in  the  quantity 
taken  whether  the  price  stands  at  fifty  cents  or  at  a  dollar  a , 
bushel,  the  difference  is  not  so  great  as  in  the  case  of  articles  . 
that  satisfy  less  urgent  wants.     On  the  other  hand,  a  fall  in 
the  price  of  certain  articles,  especially  luxuries,  is  promptly 
f>  flowed  by  a  great  increase  in  the  quantity  taken  from  the 
market. 

The  extent  to  which  changes  in  price  are  attended  by  changes 
in  quantity  taken  is  known  as  the  elasticity  of  demand.  Thus, 
when  a  relatively  slight  fall  in  priceresvMs  vrfa  relatively  great 
increase  in  the  quantity  taken,  demand  is  said  to  be  highly 
elastic.  The  unit,  or  standard,  of  elasticity  is  represented  by 
that  condition  in  which  the  product  of  quantity  taken  multiplied 
by  the  price  per  unit  remains  constant  for  different  quantities 
and  prices.    The  following  table  will  illustrate :  — 


DEMAND 


111 


Price  peb  Unit 

No.  Units  Taken 

Total  Sales 

$2.00 

1.00 

.50 

.25 

200 

400 

800 

1600 

$400 
400 
400 
400 

When  the  product  of  quantity  taken  and  price  increases 
with  a  fall  in  price,  the  demand  is  said  to  be  elastic ;  when 
the  product  decreases,  the  demand  is  said  to  be  inelastic. 
Otherwise  defined,  the  unit  of  elasticity  is  that  degree  of  elasticity 
in  which  any  change  in  price  is  attended  by  a  precisely  equal 
proportionate  but  inverse  change  in  the  quantity  taken,  and 
vice  versa. 

3.  The  Quantity  Demanded  Varies  Directly  with  the  General 
Wealth  or  Purchasing  Power.  —  In  the  third  place,  if  we  sup>- 
pose  the  marginal  utility  of  any  commodity  and  its  price  to 
remain  the  same,  it  is  evident  that  anything  which  increases 
the  purchasing  power  of  the  community  will  increase  its  de- 
mand for  the  commodity.  For  increase  of  wealth,  as  has 
been  explained,  lowers  the  marginal  utility  of  money,  and 
makes  it  possible  to  spend  more  for  other  commodities  with- 
out losing  that  surplus  of  utility  over  cost  which  determines 
purchases.  Here  again,  however,  it  is  to  be  noted  that  the 
change  in  purchasing  power  and  the  resulting  change  in 
demand  are  not  of  necessity  equal  in  degree. 

The  three  general  statements  or  laws  just  given  and  ex- 
plained may  be  summed  up  as  follows :  (1)  Demand  for  any 
commodity  varies  directly,  but  not  necessarily  in  proportion, 
(a)  with  the  marginal  tdility  of  the  commodity,  and  (b)  icith 
the  purchasing  power  of  the  community;  and  (2)  the  quantity 
taken  from  the  market  varies  inversely,  but  not  necessarily  in 
proportion,  with  the  price. 


112      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Engel's  Law  of  Family  Expenditure.  —  Further  light  is 
thrown  on  the  principles  which  we  have  been  studying  by 
the  actual  facts  regarding  the  expenditures  and  consumption 
of  families.  A  detailed  statement  of  the  income  and  outgo 
of  a  family  is  called  a  family  budget.  Careful  studies  of  such 
budgets  have  been  made  in  Saxony  and  Great  Britain  and  in 
some  of  our  ow^n  states,  notably  Massachusetts  and  Illinois. 
On  the  basis  of  the  German  statistics,  the  table  of  percent- 
ages on  the  following  page  has  been  prepared. 

Percentages  op  Family  Expenditure.    Saxony 


Items  op  Expenditure 


1.  Subsistence      .     . 

2.  Clothing      .     .     . 

3.  Lodging       .     .     . 

4.  Firing  and  lighting 
f).  Education,    public 

worship,  etc.  . 
G.  Legal  protection  . 
7.  Care  of  health      . 

5.  Comfort,  mental  and 

bodily  recreation 
Total    .... 


Percentage  of  the  Expenditure  op  the 
Family  op 


A  workingman 

with  an  income 

of  from  $225  to 

$300  a  year. 


Per 
62.0 
16.0 

12.0 
5.0 

2.0 
1.0 

1.0 

1.0 


95.0 


5.0 


100.0 


A  man  of  the 
intermediate 
class  ("Mittel- 
standes")  with 
an  income  of 
from  $450  to 
$600  a  year. 


90.0 


10.0 


100.0 


A  person  in  easy 

circumstances 

("desWohl- 

standes ' ')  with 

an  income  of  from 

$750  to  $1100  a 

year. 


Per  cent 

50.01 

18.0 

12.0 

5.0 


85.0 


5.5 
3.0 
3.0 

3.5 


15.0 


100.0 


The  following  table  permits  a  comparison  between  the 
conditions  obtaining  in  different  countries :  — 


DEMAND 


113 


Comparative  Percentages  op  Expenditures  by  the  Families 

OF    WORKINGMEN    IN    ILLINOIS,    MASSACHUSETTS,    GrEAT    BrITAIN, 

AND  Saxony 


Items  of  Expenditure 

Ilunois 

Massa- 
chusetts 

Great 
Brit^^. 

Saxony 

Average 

Subsistence       .     . 
Clothing      .     .     . 
Rent        .... 

Fuel 

Sundries       .     .     . 

41.38 
21.00 
17.42 
5.63 
14.57 

49.28 
15.95 
19.74 
4.30 
10.73 

51.36 
18.12 
13.48 
3.50 
13.54 

55.00 
18.00 
12.00 
5.00 
10.00 

49.25 
18.27 
15.66 
4.61 
12.21 

Total        .     .     . 

100.00 

100.00 

100.00 

100.00 

100.00 

As  a  result  of  his  study  of  Saxon  family  budgets,  as  already 
given,  Dr.  Ernst  Engel,  an  eminent  statistician,  laid  down 
the  following  general  laiv  of  family  expenditure,  or  domestic 
consumption. 

As  the  income  of  a  family  increases, 

(1)  The  percentage  of  expenditure  for  food  decreases; 

(2)  The  percentage  of  expenditure  for  clothing  remaitis  ap- 
proximately  the  same;  ' 

(3)  The  percentage  of  expendity^t^Jor  rent,  fuel,  and  light  is 
invariable;  .  j-,  f 

(4)  The  percentage  of  expenditure  for  education,  health, 
recreation,  etc.,  increases^^f 

From  the  figures  given  in  the  tables  it  is  evident  that  the 

demand  for  food  in  any  community  has  comparatively  little 

elasticity,  since  enough  for  subsistence  is  required  in  any  case, 

and  the  relative  amount  demanded  by  all  classes  falls  off  < 

ap*dly  ao  lliese  needs  are  satisfied*.   On  the  other  fiand,  in- 

•reased  wr  .  ,  ^    -esults  in  an  increasing  demand  for  all^'the 

'  services  that  minister  to  cultural HvfiHii.' 

ion  of  man's  higher  wants  is  necejmry  . 


.,'i' 


^N 


114      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

to  his  complete  eflSciency  as  a  producer,  we  can  understand 
from  the  tables  how  it  is  that  "  the  destruction  of  the  poor 
is  their  poverty."  They  live  in  a  vicious  circle.  The 
poverty  to  which  they  are  born  is  itself  the  bar  to  their 
escape.  Once  free  them  from  this  condition,  and  the  power 
to  perpetuate  their  own  prosperity  is  given  into  their  hands ; 
for  they  thus  become  more  efficient  as  producers  and  niore 
skillful  in  securing  a  just  share  in  the  increased  product  of 
their  labor. 

EngeFs  law  is  also  of  great  value  in  illustrating  the  unfair 
social  distribution  of  the  burden  imposed  by  ignorant  or  in- 
tentionally vicious  tax  laws.  It  is  clear  that  a  tax,  say  of 
one  dollar  a  barrel  on  flour,  however  laid,  is  boimd  to  throw 
an  entirely  disproportionate  load  upon  the  shoulders  of  the 
poor.  Yet  a  consideration  of  existing  systems  of  taxation 
can  leave  no  one  in  doubt  that  such  taxation  is  frequently 
the  rule. 

SUMMARY 

1.  Men  seek  in  their  consumption  to  secure  the  greatest  possible 

surplus  of  utility  over  cost,  and  to  maintain  an  equality  of 
marginal  utilities  in  their  different  lines  of  expenditure. 

2.  The  economic  importance  of  a  commodity  is  determined  by  its 

marginal  utility. 

3.  Demand  varies  directly  with  marginal  utility  and  with  the 

wealth  of  the  consumer:   the  quantity  demanded  varies  in- 
versely with  the  price. 

4.  Increase  of  income  means  increased  opportunity  for  expendi- 

ture on  the  comforts  and  decencies  of  life. 

QUESTIONS  FOR  RECITATION 

1.  Draw  diagrams  roughly  representing  the  initial  utility  and  the 

diminishing  utiUty  of  some  different  kinds  of  consumption 
in  your  own  case. 

2.  Which  has  the  greater  economic  importance  for  men,  water 

or  gold?     Water  or  wheat?     Contrast  other  commodities  in 
the  same  way. 


DEMAND  115 

3.  State  the  law  or  laws  of  demand.     Give  illustrations. 

4.  State  Engel's  law  of  domestic  expenditure.     What  is  the  bear- 

ing of  the  law  on  the  condition  of  the  poor?  on  taxation? 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  In  what  terms  do  we  estimate  marginal  utiHties  in  everyday  life? 

2.  What  would  be  the  relative  effect  upon  demand  for  automobiles 

and  wheat  if  the  prices  of  both  should  fall  proportionally? 
Why  has  the  price  of  copper  remained  high  in  spite  of  the 
great  increase  in  its  supply?  How  does  the  sudden  death 
of  a  President  affect  the  demand  for  mourning  goods  ?     Why  ? 

3.  What  percentages  of  their  incomes  do  different  persons  in  your 

community  spend  for  the  different  kinds  of  things  mentioned 
in  Engel's  law? 

4.  Prepare  tables  of  demand  to  show  elasticity  of  more  than  unity ; 

of  less  than  unity ;  of  unity. 

LITERATURE 

See  preceding  chapters.     Also,  on  Engel's  law:  — 

Roscher,  W. :  Principles  of  Political  Economy  (Translation),  Vol.  I, 

Ch.  I,  §§  1-6. 
Rowntree,  B.  S. :    Poverty:   a  Study  of  Town  Life. 
The  Enghsh  Board  of  Trade  Reports  on  the  Cost  of  Living  in 

England,  France,  and  Germany. 
The  Seventh  Annual  Report  of  the  United  States  Commissioner  of 

Labor  gives  the  results  of  other  investigations. 


CHAPTER  IV 

THE   ECONOMY   OF   SPENDING   AND   SAVING 

Two  important  questions  regarding  economy  in  consmnp- 
tion  remain  to  be  studied.  The  first  question  is,  briefly, 
(1)  How  can  one's  whole  expenditure  or  consumption  be  so  dis- 
tributed between  the  present  and  the  future  that  the  greatest 
>&mount  of  satisfaction  will  result?  The  second  question  as- 
sumes that  the  first  has  been  answered,  and  asks  (2)  how  the 
consumption  of  the  present  may  be  so  ordered  that  it  will  resuU 
in  the  greatest  total  of  satisfaction.  Though  both  questions 
really  have  to  do  with  expenditure,  still  we  commonly  think 
of  the  first  as  the  problem  of  saving j  as  distinguished  from 
the  problem  of  spending j  which  is  represented  in  the  second 
question. 

I.    The  Economy  of  Saving 

First  of  all  it  should  be  noted  that  the  proportion  between 
present  and  future  expenditure  conforms  to  the  general  rule 
which  has  already  been  laid  down  as  the  law  of  the  "  eco- 
nomic order  of  consmnption."  We  seek  always  in  our  ex- 
penditure to  secure  the  greatest  surplus  of  utility  over  cost ; 
hence  we  discontinue  present  expenditure  when  we  feel  that 
we  can  secure  a  greater  surplus  of  utility  by  applying  any 
remainder  of  our  purchasing  power  to  future  purchases.  Of 
course,  with  many  people  the  demands  of  the  present  are  so 

116  >/. 


THE   ECONOMY  OF   SPENDING   AND  SAVING     117 

urgent  and  their  means  so  limited  that  there  is  little  oppor- 
tunity for  any  such  balancing  of  present  and  future  surpluses. 
But  whenever  there  is  any  saving  at  all,  it  proceeds  according 
to  the  mental  comparison  just  explained. 

1.  Hoarding. — But  how  are  goods  saved?  Manifestly, 
we  may  save  goods  in  such  a  way  that  neither  we  ourselves 
nor  others  can  enjoy  them  in  the  present.  The  peasants 
of  some  countries  are  so  distrustful  of  banks  that  they  lay 
by  or  hoard  their  savings  in  secret  places  about  their  homes. 
Such  saving,  though  it  is  not  the  best,  is  better  than  harm- 
ful or  luxurious  consumption  in  the  present ;  for  if  the~good, 
for  instance,  money,  be  stored  away  in  such  a  manner  that 
it  will  not  suffer  harm,  it  may  in  the  end  minister  to  real 
and  commendable  wants. 

2.  Investment.  —  But  in  modern  times,  with  security  of 
property  guaranteed  by  a  strong  government,  and  with  easy 
opportunities  for  devoting  savings  to  productive  uses  that 
will  return  a  regular  income,  most  provident  people  prefer 
saving  by  investment  to  saving  by  hoarding.  Such  invest- 
ment may  be  (a)  directly  made  in  business  or  in  income-produc- 
ing property.  But  as  industry  becomes  more  comphcated 
and  requires  more  and  more  skill  for  successful  management, 
a  greater  number  of  people  prefer  to  (b)  invest  indirectly,  i.e., 
to  intrust  their  savings  to  the  hands  of  others  rather  than  to  in- 
vest them  directly.  The  process  is  even  carried  one  step 
farther  in  the  majority  of  cases.  Instead  of  lending  their 
savings  directly  to  those  who  manage  productive  enterprises, 
(c)  men  deposit  their  savings,  in  the  form  of  money  or  credit 
instruments,  in  banks,  and  the  banks  in  turn  take  it  upon 
themselves  to  decide  in  what  enterprises  such  savings  may 
be  most  safely  and  profitably  invested. 

The  difference  between  hoarding  and  saving  by  investment 
is,  briefly,  that  in  the  one  case  the  goods  may  ultimately  be 


118     ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

used  productively  and  economically,  while  in  the  other  case 
the  goods  saved  are  saved  by  being  used  thus  productively. 

The  Real  Nature  of  Saving.  —  The  fact  that  money  repre- 
sents goods  in  general  is  hkely  to  cause  us  to  overlook  the 
real  nature  of  saving.  From  the  individual  point  of  view, 
saving  means  the  postponement  of  consumption.  When  a 
man  saves  five  dollars  out  of  his  week's  income,  he  is  post- 
poning to  a  future  time  the  exercise  of  his  right  to  receive 
goods  to  that  amount  from  his  fellows.  He  may  do  this 
either  by  hoarding  the  money  or  by  lending  it  to  someone 
else.  But  such  acts  do  not  necessarily  result  in  saving  from 
the  social  point  of  view.  Social  saving  means  greater  power 
of  enjoyment  in  the  future  on  the  part  of  the  community  as  a 
whole.  If  A  lends  to  B  money  which  B  at  once  wastes,  A 
individually  has  saved,  but  there  has  been  no  social  saving, 
for  there  will  not  be  more  goods  to  enjoy  in  the  futiu-e  on 
account  of  this  act.  But  if,  instead  of  wasting  the  amount 
borrowed,  B  had  paid  it  out  for  the  making  of  a  machine, 
there  would  also  have  been  social  saving,  since  the  machine 
would  make  it  possible  to  produce  more  goods  in  the  future. 
Modern  societies  save  chiefly  by  bettering  their  facilities  for 
producing  goods;  the  amount  of  food,  clothing,  etc.,  that 
the  people  of  the  United  States  store  up  for  future  use  is 
comparatively  small. 

The  Make-work  Fallacy.  —  We  often  hear  men  talking 
as  if  the  man  who  spends  money  freely  were  a  public  bene- 
factor, while  the  man  who  is  not  thus  lavish  is  to  be  regarded 
with  reproach.  But  it  is  plain  from  the  foregoing  that  the 
former  is  using  up  goods  and  services  now,  while  the  latter 
may  through  his  investments  be  improving  the  productive 
^equipment  of  society.  The  one  is  telling  men  to  serve  him 
in  his  home,  in  his  stables,  and  aboard  his  yacht ;  the  other 
is  setting  them  to  work  building  factories,  —  he  is  saving 


THE   ECONOMY   OF  SPENDING   AND  SAVING     119 

socially.  It  is  true,  this  may  in  its  turn  be  pushed  too  far. 
We  may  make  the  mistake  of  spending  all  our  time  and  effort 
in  getting  ready  to  live  at  some  future  day,  when  it  would 
be  wiser  and  better  to  spend  some  thought  upon  actual  living. 
But  perhaps  neither  individuals  nor  nations  need  such  a 
warning. 

"  Spending  money  to  make  trade  good  "  is  thus  seen  to  he 
fallacious. 

II.    The  Economy  of  Spending 

Having  considered  the  first  of  the  two  questions  which 
were  raised  at  the  beginning  of  this  chapter,  we  have  next  to 
consider  the  other,  —  the  question  of  how  to  order  one's 
present  consumption  that  the  greatest  good  may  result. 

First  of  all,  for  economy  in  spending,  two  things  are 
essential,  which  we  may  call  (A)  the  economy  of  right  choice, 
and  (B)  the  economy  of  right  use.  The  economy  of  right 
choice  depends  upon  a  correct  knowledge  of  those  present  uses 
to  which  commodities  may  be  most  advantageously  applied, 
while  the  economy  of  right  use  depends  upon  a  knowledge  of 
the  most  efficient  means  of  applying  the  goods  to  those  uses. 

(A)  The  Economy  of  Right  Choice.  —  In  considering  the 
question  of  how  economy  may  be  secured  through  right 
choice,  we  enter  into  a  field  of  thought  that  forms  the  border- 
land between  ethics  and  economics.  First  of  all,  we  are 
probably  safe  in  asserting  that  from  the  point  of  view  of  society 
as  a  whole,  economy  requires  that  the  results  of  social  effort 
should,  in  the  highest  practicable  degree,  be  distributed  among 
the  individuals  in  society.  When  many  toil  and  go  without 
the  mere  decencies  of  life  in  order  that  a  few  may  be  lapped 
in  luxury  without  toil  or  care,  it  is  evident  that  a  fundamental 
rule  of  social  economy  is  violated.    Without  discussing  here 


120     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

how  far  such  a  condition  may  be  prevented,  we  may  all 
agree  that  it  does  not  represent  an  ideal  of  economy  for  a 
democratic  society.  • 

The  Waste  of  Luxury.  —  Expenditure  for  luxuries,  or 
luxurious  consumption,  is  not  economical  consumption,  be- 
cause it  does  not  adapt  resources  to  their  most  advantageous 
uses.  The  subject  of  luxm-y  is  a  diflBcult  one  to  discuss, 
since  a  definition  of  the  thing  itself  is  by  no  means  easy. 
Many  things  are  to-day  easily  obtainable  by  the  poorest 
which  two  centuries  ago  could  be  enjoyed  only  by  the  most 
wealthy  and  powerful.  Such  things  are  never  thought  of  as 
luxuries  in  modern  days,  but  if  their  possession  in  the  olden 
time  required  the  exploitation  of  the  poor  and  did  not  render 
their  possessors  able  and  willing  to  confer  great  social  service 
in  return,  we  must  hold  that  they  were  then  luxuries.  To 
the  illiterate  man,  a  library  is  a  luxury;  to  the  scientist,  it 
may  be  a  necessity  for  complete  eflBciency.  These  illustra- 
tions may  serve  to  show  the  difficulty  of  reaching  any  simple 
and  clear  definition  of  luxm-y,  and  the  equally  great  difficulty 
of  establishing  any  universal  principles  by  which  we  may 
always  judge  such  expenditure.  Yet  it  is  possible  to  lay 
down  a  definition  which  at  the  same  time  implies  a  principle 
of  social  economy  in  expenditure  and  suggests  an  ethical  pre- 
cept :  Luxury  consists  in  any  consumption  of  commodities  and 
services  which  is  seriously  out  of  proportion  to  the  service  thai 
it  enables  the  consumer  to  return  to  society y  hut  which  is  not  of 
necessity  directly  injurious  to  the  consumer. 

But,  it  may  be  asked,  has  not  a  man  the  right  to  do  as  he 
will  with  his  own  ?  And  the  answer  must  be.  Yes,  in  a  very 
full  measure,  if  you  judge  right  solely  by  the  statute  law. 
No  court  had  appointed  Cain  to  the  guardianship  of  Abel. 
But  the  statute  law  follows  only  slowly  and  haltingly  after 
the  growing  sense  of  right  and  duty  as  it  develops  in  the 


THE  ECONOMY  OF  SPENDING   AND  SAVING     121 

^  ace .  The  laws  have  often  granted  extreme  rights  of  property 
.  nd  use,  because  it  has  been  beheved  that  on  the  whole  men 
have  worked  harder,  produced  more,  and  been  happier, 
when  they  were  given  such  almost  unfettered  rights  of  dis- 
posing of  their  product.  Now,  however,  men  are  becoming 
more  socially  inclined.  More  and  more,  rich  and  talented 
men  are  coming  to  regard  their  riches  and  their  talents  as 
trusts  that  have  been  committed  to  them,  rather  than  as 
possessions  that  they  may  squander  without  a  thought  for 
their  fellows.  As  this  feeling  of  responsibility,  of  steward- 
ship, becomes  developed,  our  law  is  changing  to  recognize 
the  change  in  the  idea,  and,  so  far  as  may  be,  to  compel  the 
unsocial  to  feign  the  virtue  if  they  have  it  not.  Indeed, 
save  in  exceptional  instances,  there  may  be  no  need  for  a 
change  in  the  law,  since  public  opinion  would  be  sufficiently 
powerful  to  accomplish  the  purpose  of  checking  lavish  dis- 
play. 

But  we  must  revert  to  oiu*  caution.  Too  great  penurious- 
ness  is  an  evil  only  less  serious  than  prodigality.  We  must 
not  forget  that  a  rational  expansion  in  the  number  and 
variety  of  hiunan  wants  is  necessary  to  human  progress. 

The  Waste  of  Harmful  Consiunption.  —  In  speaking  of 
luxurious  consumption,  we  have  said  that  it  does  not  neces- 
sarily involve  immediate  and  direct  harm  to  the  consumer 
himself.  When  such  harm  does  result,  it  is  more  usual  to 
speak  of  the  consumption  as  harmful  rather  than  as  luxuri- 
ous. It  goes  without  saying  that  harmful  consumption  calls 
for  the  censure  of  the  economist  no  less  than  for  that  of  the 
ethical  teacher,  since  it  is  in  the  highest  degree  wasteful, 
whether  regarded  from  the  point  of  view  of  the  individual  or 
of  society.  When  a  nation  devotes  a  large  amount  of  its  labor 
and  capital  to  the  production  of  commodities  which,  in  their 
consumption,  cause  more  misery  than  happiness,  and  weaken 


122     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  nation's  future  resources  of  energy  and  intelligence,  there  is 
n  departure  from  economical  consumption  so  serious  as  to  call 
for  the  severest  condemnation.  If  society  would  forego  such 
injm*ious  consumption,  bread  would  be  cheaper,  higher  wants 
would  find  satisfaction,  and  man  would  be  working  away 
from  the  beast's  low  level  of  mere  sensual  gratification. 

Some  Rules  for  Economy  in  Choices.  —  We  may  exercise 
an  influence  over  the  growth  of  our  own  wants  in  such  a  way 
that  a  great  real  satisfaction  may  flow  from  a  comparatively 
small  expenditure.  Thus  (1)  we  should  cultivate  enjoyment 
or  coTisumption  that  is  inclusive  {or  inexclu^ve)  rather  than 
exclusive  in  its  nature.  It  is  evident  that  if  a  community 
can  cultivate  such  a  love  for  art  that  its  satisfaction  will 
consist  in  viewing  beautiful  pictures  or  statues  rather  than 
in  owning  them  individually,  it  will  be  possible  to  secure  such 
satisfaction  by  joint  purchase  most  economically.    Again, 

(2)  we  should  cultivate  harmonious  consumption.  We  all 
know,  to  take  a  homely  example,  that  bread  and  butter 
together  give  a  greater  enjoyment  than  would  result  from 
the  consumption  of  the  two  separately.  But  harmony  of 
consumption  is  by  no  means  limited  to  such  simple  cases  as 
this.  Whenever  a  group  of  commodities  produces  in  combinor 
tion  a  greater  satisfaction  than  results  from  the  consumption  of 
the  same  commodities  separately,  the  consumption  of  the  group 
is  harmonious  consumption,  and  is  most  economical.    Finally, 

(3)  we  should  cultivate  variety  in  consumption.  The  greater 
the  variety  of  goods  consumed,  the  higher  imll  he  the  marginal 
ulility  of  the  goods,  and  hence  the  keener  the  satisfaction  in  their 
consumption.  Moreover,  the  wider  the  range  of  a  man's 
likings,  the  more  certain  is  he  to  find  satisfaction  under 
widely  varying  conditions,  as  when  traveling  among  strangers. 
To  take  a  simple  instance,  a  family  with  little  variety  of 
taste  or  desire  in  the  matter  of  food  is  at  the  mercy  of  price 


THE  ECONOMY  OF  SPENDING  AND  SAVING     123 

'  nges  within  that  limited  range  of  food  purchase,  while 
se  who  have  cultivated  varied  tastes  are  able  to  give  up 
the  consumption  of  any  one  form  of  food,  when  it  becomes 
expensive,  without  great  loss  of  enjoyment.  If  the  Ameri- 
can people  would  cultivate  a  taste  for  other  kinds  of  bread 
than  that  made  from  wheaten  flour,  they  could  get  their  satis- 
faction from  the  other  kinds  of  bread  as  well  as  from  the 
wheaten  bread  itself  more  cheaply  than  they  now  do. 

(B)  The  Economy  of  Right  Use.  —  Hitherto,  we  have  been 
speaking  of  a  lack  of  economy  due  to  the  failure  to  choose 
the  right  commodities  or  to  appropriate  those  chosen  to  their 
most  advantageous  uses.  But  even  when  they  are  so  applied, 
there  is  generally  some  waste  in  the  method  of  using  them. 
It  is  even  probable  that  more  waste  arises  in  this  way  than 
in  the  other,  though  the  harm  to  character  is,  of  course,  in- 
calculably less. 

The  Economic  Importance  of  Housekeeping.  —  It  is  here 
that  the  great  influence  of  the  wife  and  mother  can  be  seen. 
Probably  not  less  than  three-fourths  of  the  income  of  the 
average  family  depends,  for  the  economy  of  its  expenditure, 
upon  the  woman  to  whom  the  affairs  of  the  household  are 
intrusted.  The  importance  of  this  consideration  has  often 
been  overlooked.  Americans,  in  particular,  have  incurred 
the  reproach  of  wasteful  methods  in  providing  food  for  the 
family.  Such  waste  may  result  (1)  from  the  choice  of  foods 
that  contain  relatively  little  nutriment;  (2)  from  the  choice  of 
foods  not  well  suited  to  the  particular  needs  of  the  consumers; 
(3)  from,  failure  to  utilize  all  the  material  that  is  purchased  and 
that  would  supply  nutriment ;  (4)  from  bad  preparation  of 
the  food  ;  (5)  from  failure  to  utilize  to  the  full  the  fuel  devoted 
to  cooking.  Similar  wastes  are  repeated  in  the  matter  of 
clothing.  It  has  been  calculated  by  careful  investigators, 
that  through  these  channels  there  is  a  waste  in  the  ordinary 


124     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

family  income  of  over  one-tenth  of  the  total.  If  the  calcula- 
tion be  correct,  we  may  conclude  that  a  stoppage  of  these 
wastes  would  enable  the  average  family  to  secure  its  present 
enjoyments  with  a  working  day  shortened  by  an  hour,  or  to 
increase  the  sum  of  their  enjoyments  by  more  than  a  tenth 
without  any  increase  in  the  amount  of  work  required. 

SUMMARY 

1.  Economy  in  consumption  requires  an  economical  balancing  of 

expenditures  between  the  present  and  the  future,  and  an 
economical  ordering  of  present  expenditure:  the  one  is  the 
economy  of  "saving"  ;  the  other,  the  economy  of  "spending." 

2.  Saving,  unless  it  is  merely  hoarding,  is  really  spending  for  the 

future.  Therefore,  a  wise  balancing  of  present  and  future 
is  secured  by  the  mean  between  prodigality  and  parsimony. 
The  prodigal  is  not  a  public  benefactor. 

3.  Economy  in  present  consumption  requires  right  choices  and 

right  uses  of  the  things  chosen. 

4.  Luxury  and  harmful  consumption  both  violate  the  rule  of  right 

choices  and  are  uneconomical.  Inclusive,  harmonious,  and 
varied  consumption  is  most  economical. 

5.  The  economy  of  right  uses  depends  largely  upon  the  home  maker. 

QUESTIONS   FOR   RECITATION 

1.  Discuss  the  fallacy:    "Spending  money  makes  trade  good."- 

Why  and  how  does  the  man  who  saves  spend?  Through 
what  agency  is  this  spending  for  the  future  usually  done  in 
modem  society? 

2.  What  two  general  principles  must  be  observed  in  economizing 

on  present  expenditure? 

3.  What  is  luxury?     What  are  its  economic  effects?     How  does 

it  differ  from  harmful  consumption? 

4.  Explain  by  illustrations  the  economy  of  variety  in  consumption ; 

of  harmonious  consumption ;   of  inclusive  consumption. 

QUESTIONS   FOR   STUDY  AND   DISCUSSION 

1.  Why  is  a  public  library  economical? 

2.  What  is  meant  by  the  statement  that  "saving  is  spending"? 

that  "saving  is  spending  for  future  goods"? 


r'HE   ECONOMY   OF   SPENDING  AND  SAVING     125 

3  hat  would  be  the  result  if  all  men  spent  their  income  only  for 
what  they  regarded  as  sheer  necessities? 

4  ma  poor  man  save,  i.e.  spend  for  future  goods,  otherwise 
than  by  putting  money  in  a  savings  bank,  or  by  what  is 
usually  called  investment?  What  of  expenditure  for  increase 
of  efficiency  of  himself  or  his  children?  Can  saving  be  carried 
too  far  ? 

5.  Use  the  marginal  utility  theory  to  show  possible  social  gain 
from  more  nearly  equal  distribution  of  social  income  among 
men. 

LITERATURE 

See  preceding  chapters.     Also :  — 

Atwater,  W.  0. :    "Food  Waste  in  American  Households"  (article 

in  Forum  for  September,  1893). 
Ely,  R.  T. :   Property  and  Contract,  Book  I,  Ch.  VI. 
Hamilton,  J.  H. :   Savings  and  Savings  Institutions,  pp.  31-38. 
Patten,  S.  N. :   Dynamic  Economics,  pp.  39-49. 


PART  n.     PRODUCTION 

CHAPTER  I 
INTRODUCTORY 

Why  Production  should  be  studied  next.  —  We  have 
made  human  wants,  consumption,  and  demand  the  first  sub- 
jects of  our  study  of  economic  theory  because  it  is  from  these 
that  all  other  economic  phenomena  take  their  rise.  We  have 
seen  why  men  exert  themselves  in  the  work  of  production. 
The  next  logical  step  is  to  inquire  how  men  go  about  the  work 
of  production.  We  have  studied  the  cause  and  the  laws  of 
demand.  We  have  next  to  make  a  similar  inquiry  regarding 
supply.  Our  present  study  therefore  is  of  the  general  sub- 
ject of  production. 

What  Production  is.  —  Just  as  consumption  means  the 
destruction,  not  of  matter,  but  of  the  particular  utilities  of 
certain  forms  of  matter,  so  production  means  the  creation,  not 
of  matter,  but  of  utilities.  Man  cannot  create  matter.  Neither 
the  farmer  nor  the  merchant  adds  one  atom  to  the  existing 
material  of  the  earth.  Yet  both  are  called  producers,  and 
properly  so.  What,  then,  do  they  produce  ?  If  one  thinks 
about  it,  one  will  discover  that  they  are  producing  utilities 
and  nothing  else.  And  how  do  they  do  this?  Simply  by 
putting  things  in  places  appropriate  to  that  purpose.  "  This 
one  operation,"  says  John  Stuart  Mill,  "  of  putting  things 
into  fit  places  for  being  acted  upon  by  t{ieir  own  internal 
forces,  and  by  those  residing  in  other  natural  objects,  is  all 
that  man  does  or  can  do  with  matter." 

120 


INTRODUCTORY  127 

Production  essentially  the  same.  —  It  has  seemed  to 
s<  even  among  economists  of  an  earlier  time,  that  the 

f{  r  is  more  truly  a  producer  than  the  manufacturer,  and 
the  manufacturer  than  the  merchant;  but  careful  thought 
discloses  the  fallacy  of  such  a  view.  All  industrial  classes 
alike  produce  one  or  more  of  the  sorts  of  utility  which  we 
have  described,  and  they  do  so  by  changing  the  relations  of 
things  in  time  or  space.  The  farmer  changes  the  position  of 
grains  of  corn  by  dropping  them  into  the  earth.  Then  he 
removes  weeds  and  throws  earth  about  the  rising  stalks. 
Thus  man's  acts  in  changing  the  relations  and  position  of 
things,  aided  by  nature's  materials  and  forces,  result  in  more 
corn  for  human  consumption.  The  manufacturer  in  the 
same  way  changes  the  position  of  pieces  of  matter,  and, 
aided  by  natural  forces  within  and  without  the  object  of  pro- 
duction, he  causes  matter  to  assume  a  form  which  fits  it,  or 
better  fits  it,  for  human  needs.  So,  too,  the  merchant 
changes  the  places  of  things  from  where  they  are  less  useful 
to  where  they  are  more  useful,  or  holds  them  in  one  place 
until  a  change  of  external  circumstances  gives  them  a  greater 
time  utility.  He  is  producing  utilities  as  truly  as  is  the 
farmer  or  the  manufacturer.  Of  course  it  is  possible  that 
the  utilities  actually  produced  by  merchants  could  be  pro- 
duced with  a  smaller  expenditure  of  economic  force  than  is 
the  case  at  present,  and  that  saving  could  be  effected  by  a 
better  organization  of  the  work  of  production.  Again,  it 
may  be  that  the  merchant  may  now  and  then  secure  a  larger 
return  for  the  production  of  a  given  quantity  of  utility  than 
does  the  farmer.  But  all  this  affords  no  justification  for 
the  popular  impression  that  his  work  is  really  less  productive 
in  its  nature  than  is  that  of  any  other  industrial  class.  The 
only  difference  is  in  the  sort  of  utility  that  the  different 
classes  are  engaged  in  producing.    Finally,  it  must  be  re- 


128     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

membered  that  in  the  same  way  the  physician,  the  teacher, 
and  all  others  who  are  engaged  in  rendering  personal  serv- 
ices, are  creating  utilities,  and  are  therefore  producers. 

Production,  then,  we  may  define  as  the  creation  of  utilities 
by  the  application  of  man's  mental  and  physical  powers  to  the 
physical  universe,  which  furnishes  materials  and  forces. 

We  have  already  defined  goods  and  economic  goods.  It 
remains  for  us  here  to  call  attention  to  the  fact  that  those 
quantities  of  utility  that  result  from  labor  are  economic 
goods,  but  that  not  all  economic  goods  are  to  the  same  extent 
the  result  of  labor.  One  may  pick  up  a  diamond  or  a  nugget 
of  gold  upon  which  one  has  stumbled :  in  such  a  case  it 
can  hardly  be  said  that  the  economic  good  is  the  result 
of  labor  at  all.  But  even  in  such  rare  cases  it  must  be 
remembered  that  while  the  one  diamond  or  the  one  nugget 
may  have  required  no  labor  in  getting,  yet  the  whole 
stock  of  such  goods  is  the  result  of  toil  and  suffering  and 
privation  for  which  the  value  of  our  diamonds  and  gold, 
it  is  frequently  said,  does  not  represent  an^'thing  like  a 
proper  recompense. 

Yet  there  are  clearly  marked  cases  of  value  creation  that 
are  not  wealth  production.  For  example,  the  land  on  which 
New  York  and  Chicago  stand  could  once  have  been  pur- 
chased for  a  very  small  sum  of  money.  The  great  value 
which  that  land  now  has  is  to  a  considerable  degree  the  result 
of  human  labor,  but  much  of  it  is  due  to  the  great  increase 
in  population,  which  of  itself  represents  no  idea  of  labor. 
Such  value  is  a  product  of  social  aggregation,  not  of  individual 
effort.  The  question  of  the  expediency  of  allowing  indi- 
viduals to  appropriate  the  rent  of  land,  one  of  the  individually 
unearned  increments  of  value,  will  be  discussed  later.  Here  it 
concerns  us  only  to  notice  that  such  unearned  increments 
exist ;  in  other  words,  that  there  is  such  a  thing  in  the  world 


\  INTRODUCTORY  129 

as  e  creation  which  is  not  at  the  same  time  wealth  pro- 
duc  ^xx. 

Individual  and  Social  Wealth.  —  This  distinction  between 
the  individual  and  the  social  points  of  view  runs  throughout 
economics,  and  it  is  particularly  important  in  the  case  of  the 
concept  of  wealth  or  economic  goods.  What  is  wealth  to 
the  individual  may  not  be  wealth  to  society,  and,  on  the 
other  hand,  what  is  wealth  to  society  may  not  be  within  the 
ownership  of  an  individual.  Thus  a  mortgage  is  wealth  to 
the  individual  who  holds  it,  but  it  is  not  a  part  of  social 
wealth,  since  if  the  claim  for  which  it  stands  is  extinguished, 
society  is  neither  richer  nor  poorer.  The  case  is  the  same 
with  bonds  issued  by  a  city,  a  state,  or  a  nation.  To  mark 
this  distinction,  such  things  as  mortgages,  notes,  bonds,  etc., 
are  sometimes  called  "  representative  goods."  From  the 
point  of  view  of  society  they  are  not  wealth,  but  legally  en- 
forceable claims  upon  wealth,  or  symbols  of  the  part  owner- 
ship of  wealth. 

Productive  Elements  often  overlooked.  —  There  are 
many  important  facts  regarding  production  which  are  often 
overlooked.  Thus  we  are  likely  to  forget  that  even  to-day 
a  large  part  of  production  is  household  production,  and  is 
not  designed  for  the  market  place  at  all. 

Again,  we  are  likely  to  overlook  the  fact  that  in  the  rural 
districts,  where  one-third  of  the  population  of  the  United 
States  lives  and  works,  there  is  annually  produced  a  vast 
amount  of  goods  which  are  destined  not  for  the  market  but 
for  home  consumption.  Vegetables,  small  fruits,  —  culti- 
vated and  wild,  —  butter,  eggs,  meat,  fish  caught  in  public 
waters,  and  game  are  some  of  the  things  that  may  serve  as 
illustrations. 

Considerations  of  this  character  show  the  great  need  of 
caution  in  attempting  to  compare  the  annual  production  of 


130      ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

one  country  with  that  of  another,  or  to  compare  the  annual 
production  of  the  same  country  at  different  periods.  House- 
hold production  is  becoming  relatively  less  important,  while 
the  production  of  things  for  the  market,  the  value  of  which 
is  readily  measured  in  money,  is  constantly  gaining  in  im- 
portance. Hence,  apparent  annual  production  —  the  pro- 
duction of  things  which  have  a  market  price  set  upon  them 
—  is  increasing  more  rapidly  than  is  the  real  annual  produc- 
tion. The  result  is  a  tendency  to  overestimate  our  progress 
and  even  to  count  as  progress  what  may  not  be  progress  at 
all.  Thus,  should  boarding  house  and  hotel  life  displace 
private  housekeeping,  annual  production  might  appear  to 
increase  as  a  result  of  the  change,  though  the  real  wealth 
and  income  of  the  country  would  evidently  be  affected  in  no 
such  degree.  The  fallacy  underlying  such  statistics  is  the 
key  to  the  old  joke  about  a  community  whose  members 
"  get  their  living  by  doing  one  another's  washing." 

Still  further  care  must  be  exercised  in  studying  oflficial  or 
unofficial  estimates  of  the  wealth  of  a  country.  These  esti- 
mates are  ordinarily  made  in  terms  of  money.  Now  if  com- 
modities are  very  abundant,  relatively  to  money,  their  price, 
other  things  being  equal,  will  be  low,  though  the  real  wealth 
of  the  country  is  great.  If,  for  instance,  the  quantity  of 
cotton  cloth  produced  doubles  between  two  census  periods, 
while  the  price  falls  one-half,  the  total  value  of  the  product 
will  appear  in  the  census  estimates  as  equal  in  the  two  cases, 
though  it  is  evident  that  society  in  the  second  period  has 
twice  the  amount  of  this  valuable  commodity. 

Over-production  anS  Under-consumption.  —  It  is  not  un- 
common to  find  men  expressing  a  belief  in  the  f)ossibility  of 
general  over-production.  Still  more  common  is  it  for  men 
to  hold  views  which  could  only  be  correct  if  general  over- 
production were  a  possibility.    Even  some  economists  a  cen- 


INTRODUCTORY  131 

til,  ijo  fell  into  the  same  error.  By  general  over-production 
is  meant  a  production  of  commodities  in  general  beyond  the 
needs  of  society.  Careful  thought  will  show  at  once  the  ab- 
surdity of  such  an  idea.  The  purpose  of  production,  as  we 
have  seen,  is  consumption.  Manifestly,  there  has  never  been 
a  time  when  more  economic  goods  were  produced  than  men 
really  needed  to  satisfy  their  legitimate  wants.  On  the  con- 
trary, there  has  never  been  enough  produced  for  this  purpose. 
Sometimes,  indeed,  production  moves  forward  unevenly,  and 
undue  amounts  of  labor  and  capital  are  for  a  time  devoted 
to  producing  particular  commodities ;  but  until  all  men  are 
well  fed,  well  clothed,  and  well  housed,  and  furnished  with 
material  and  other  agencies  for  their  higher  life,  such  as  books 
and  pictures,  it  will  be  a  manifest  absurdity  to  talk  about 
general  over-production.  When  there  is  an  almost  universal  | 
difficulty  in  disposing  of  goods,  the  chief  cau^e  is  not  over-) 
production  but  under-consumption.  Men  want  the  goods, 
but  they  cannot  at  the  time  dispose  of  their  services,  and 
consequently  lack  the  purchasing  power  that  would  enable 
them  to  satisfy  their  wants.  When  any  class  of  goods  is 
produced  in  such  quantities  that  the  price  falls  below  the 
cost,  we  may  say  that  there  is  over-production  of  these 
goods.  Such  over-production  is  not  uncommon.  It  is  one 
of  the  unpleasant  features  of  our  complex  organization  of 
economic  society  that  its  parts  do  not  always  work  together 
harmoniously.  Producers  are  more  and  more  separated  in 
time  and  space  from  those  who  are  to  consume  their  products. 
It  follows  that  only  the  shrewdest  producers  can  calculate 
with  any  approach  to  accuracy  how  intense  will  be  the  wants 
for  their  goods,  and  in  what  quantities  rival  producers  will 
furnish  goods  to  the  market.  Mistakes  in  judgment  result  in 
aoer-produjction  in  particular  industries y  and  over-production  in 
a  few  industries  often  leads  to  the  spread  of  doubt  and  uncer' 


132     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

tainty  throughout  the  business  world.  Then  men  in  their  feat 
restrict  production  and  thus  incidentally  close  the  market  for 
labor.  Laborers,  seeking  and  failing  to  find  regular  employ- 
ment, lose  their  purchasing  power,  with  the  result  that  the  under- 
consumption spreads  all  along  the  line,  and  society  passes 
through  what  is  called  a  crisis  or  panic,  followed  by  an  indus- 
trial depression.  Such  crises  and  depressions  have  been 
startUngly  regular  since  the  Industrial  Revolution,  the 
greater  ones  coming  at  intervals  of  about  twenty  years,  with 
minor  ones  in  the  alternating  ten-year  intervals. 

The  explanation  here  given  of  crises  and  the  resulting  industrial 
depressions  is  widely  acccepted  by  economists,  but  there  are  two 
other  explanations  that  should  be  mentioned.  Some  radical  writers 
regard  the  unequal  distribution  of  wealth  as  the  fundamental  cause. 
If  wages  do  not  rise  in  proportion  to  the  general  increase  in  wealth, 
it  is  argued,  the  mass  of  the  consumers,  who  are  wage-earners,  will 
lack  the  means  to  purchase  the  goods  produced.  Again,  other 
writers  emphasize  the  monetary  and  credit  aspects  of  crises.  The 
crisis  of  1893,  for  example,  is  by  some  regarded  largely  as  a  monetary 
disturbance. 

Production  and  Sacrifice.  —  Consumption  regularly  affords 
satisfaction.  Production  as  regularly  requires  sacrifice  and 
exertion.  We  should  recall  here,  what  we  have  already 
noted  in  studying  consumption,  that  the  balancing  of  the 
satisfaction  of  wants  derived  from  consumption  against  the 
exertion  and  sacrifice  required  by  production  lies  at  the  very 
center  of  all  economic  thought.  It  is  true  that  much  labor 
seems  in  itself  so  pleasurable  that  it  affords  its  own  satis- 
faction. But  if  such  labor  is  not  sufficient  to  produce  the 
goods  that  society  demands,  other  labor  which  does  not  con- 
tain its  own  reward  must  be  applied  to  production,  and  the 
same  reward  will  be  paid  by  society  for  all  labor  applied  to 
that  end.  In  most  cases,  however,  it  will  be  found  on  inves- 
tigation, the  pleasure  comes  from  the  actual  or  anticipated 


INTRODUCTORY  133 


result  of  the  labor  rather  than  from  the  labor  itself.  Again, 
when  we  consume  to-day  less  than  we  have  means  to  con- 
sume, with  the  object  of  greater  production  in  future  time, 
we  are  aiding  in  production  by  temporary  abstinence  from  a 
possible  pleasure.  True,  in  such  cases  we  hope  to  get  in 
the  future  a  satisfaction  that  will  outweigh  the  present 
unsatisfied  feeling,  but  the  unsatisfied  feeling  is  present 
with  us  and  must  be  endured  if  we  are  to  contribute  to 
production. 

The  Production  of  Goods  and  Services.  —  In  what  follows 
we  shall  treat  the  production  of  material  goods  and  services 
together,  since  there  is  little  essential  difference  between  the 
two  forms  of  production.  It  is  worth  noting,  however,  that 
the  proportion  of  human  effort  devoted  to  the  production  of 
commodities  and  services  respectively  varies  with  the  progress 
of  civilization.  In  early  stages,  when  only  the  most  pressing 
wants  are  either  felt  or  satisfied,  men  perform  for  themselves 
such  simple  services  as  are  required.  It  is  only  later  that 
there  arises  a  want  for  such  personal  services  as  call  for 
special  training.  The  social  order  gradually  increases  in 
complexity,  and  as  a  result  of  new  wants  and  increased  means 
of  satisfying  them,  division  of  labor  among  men  makes  a 
place  for  the  singer  and  poet,  the  physician  and  priest,  and 
for  other  classes  who  are  engaged  in  producing  personal  serv- 
ices. As  the  production  of  material  goods  becomes  better 
organized,  requiring  less  proportionate  human  effort,  greater 
numbers  of  people  will  find  it  profitable  to  specialize  their 
training  and  effort  toward  rendering  personal  service  of  one 
sort  or  another  to  society. 

SUMMARY 

1.  Production  means  the  creation,  not  of  things,  but  of  utilities^ 

by  the  appHcation  of  man's  powers  to  the  physical  universe. 

2.  Individual  wealth  is  not  always  social  wealth. 


134     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

3.  Many  productive  elements,  such  as  woman's  work  in  the  house- 

hold,  and  the  gathering  of  natural  products  for  home  use, 
are  often  overlooked. 

4.  There  can  be  no  general  over-production.     What  is  thought  of 

when  that  expression  is  used  should  rather  be  called  under- 
consumption or  unbalanced  production. 

5.  With  advancing  civilization,  an  increasing  proportion  of  human 

energy  is  devoted  to  rendering  speciahzed  personal  services. 

QUESTIONS   FOR   RECITATION 

1.  Define   production.     Compare   the   definition   of   consumption 

with  that  of  production. 

2.  Why  and  how  is  the  physician  a  producer?     The  teacher?     The 

actor? 

3.  Mention   instances   of   individual   wealth.     Of   social   wealth. 

Do  all  your  examples  belong  to  both  classes? 

4.  As  cities  increase  in  size,  the  value  of  street  railway  franchises 

regularly  increases.     Is  this  value  a  result  of  production? 
Explain. 

5.  What  is  usually  meant  by  the  expression  "over-production"? 

Is  such  a  thing  possible?     What  is  it  that  is  commonly  mis- 
taken for  general  over-production  ? 

6.  Show  by  a  detailed  explanation  how  it  is  that  more  men  are 

engaged  in  rendering  personal  services  than  was  the  case  in 
earlier  days. 

QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  What  economy  results  from  the  fact  that  with  increasing  popu- 

lation, there  is  a  wider  range  of  occupations  open  to  individ- 
uals? 

2.  Is  there  any  sense  in  which  it  may  be  argued  that  soldiers  in 

war  are  producers?     Is  theft  a  process  of  production? 

3.  A  farm  worth  $10,000  is  mortgaged  for  $5000.     Is  the  value  of 
-^         the  farm  and  mortgage  together  $15,000  or  $10,000?     Ex- 
plain.    How  should  a  tax  be  placed  in  this  case  upon  the 
wealth? 

4.  What  utilities  are  produced  and  consumed  in  your  home  which 

do  not  have  a  money  value  put  upon  them  ? 

5.  Germany  owns  her  railways.     How  would  this  fact  bear  upon 
-v^         census  estimates  of  the  wealth  of  the  German  people  as  com- 
pared with  similar  estimates  of  the  wealth  of  the  people  of 
the  United  States  ? 


INTRODUCTORY  135 


LITERATURE 

For  a  general  discussion  of  the  subject  of  production,  consult  any- 
standard  work  on  Economics.  A  considerable  number  of  these 
are  given  in  the  Appendix.     See  especially :  — 

Marshall,  A. :   Principles  of  Economics,  Bk.  II,  Ch.  II,  §§1  and  2. 

Mayo-Smith,  R. :   Statistics  and  Economics,  Chs.  Ill,  IV,  and  V. 

Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  I,  Ch.  I,  §§  1  and  2. 


CHAPTER  II 

THE   FACTORS   OF   PRODUCTION 

The  Three  Factors.  -:-  Three  things  contribute  to  produc- 
tion as  it  is  carried  on  to-day.  They  are  therefore  called 
the  factors  of  production.  Of  these,  two  are  called  original 
or  primary  factors,  because  they  exist  in  the  very  earliest 
forms  of  production,  and  because  it  is  from  them  that  the 
third  factor  is  derived.  These  two  factors  are  land,  or 
nature,  and  labor.  Of  these,  in  turn,  we  may  notice  that 
one,  land,  is  passive,  while  the  other,  labor,  is  active.  In  other 
words,  it  is  primarily  labor,  acting  upon  nature,  that  pro- 
duces wealth.  From  this  action  of  labor  upon  nature,  fol- 
lowed by  postponement  of  the  enjoyment  of  the  result  of 
the  labor,  comes  capital,  which  we  therefore  call  a  second- 
ary or  derived  factor.  That  is,  it  is  secondary  to  nature  and 
labor,  and  is  derived  from  them. 

Natuke  or  Land 

Meaning  of  the  Term.  —  Under  the  term  "  nature  "  we 
here  include  all  the  material  things  furnished  directly  by  her 
hand,  together  with  all  the  natural  forces  used  in  produc- 
tion, —  the  ix)wer  of  the  wind,  the  movement  of  water,  gravi- 
tation, cohesion,  etc.  Some  of  these  materials  and  forces 
are  furnished  in  unlimited  quantities,  and  are  therefore  free 
goods.    It  is  common  in  economics  to  use  the  word  "  land  " 

136 


THE   FACTORS   OF   PRODUCTION  137 

instead  of  "  nature/'  because  of  all  the  gifts  of  nature  it  is 
land  with  which  we  have  chiefly  to  do  in  our  science.  But 
it  must  be  remembered  that  the  word  "  land  "  in  this  use 
has  the  very  broad  meaning  which  we  have  here  giveiji  it. 
To  avoid  any  possibility  of  confusion  some  economists  have 
used  the  term  "  natural  agents,"  when  the  broader  meaning 
is  intended. 

What  Land  does  for  Production.  —  By  analysis  we  learn 
that  the  service  of  land  to  production  is  not  a  single  or  a 
simple  thing,  but  that  it  usually  renders  one  or  more  of  four 
distinct  services.  In  the  first  place  (1)  it  furnishes  standing 
room,  or  situs.  It  gives  men  something,  upon  which  they 
may  rest  and  move  about  while  conducting  productive 
processes.  Mere  space  is  often  a  source  of  great  value,  as 
can  be  seen  in  the  case  of  city  real  estate.  As  a  continually 
increasing  proportion  of  a  growing  population  dwells  in 
cities,  this  first  service  rendered  by  land  is  becoming  more 
important.  In  the  second  place  (2)  it  enables  men  to  utilize 
the  natural  forces  that  go  with  the  land  itself.  In  the  third 
place  (3)  land  contains  those  elements  needed  by  plant  life,  and 
thu^  renders  a  service  to  agriculture.  We  call  this  property  of 
the  land  its  ^'  fertility  J  ^  Finally,  (4)  land  contains  natural 
produxits  below  its  surface,  such  as  coal,  gas,  petroleum,  iron, 
silver,  and  gold.  Man  does  not  create  these  natural  treas- 
ures nor  give  direction  to  nature  in  their  formation.  Some 
nations  have  deemed  it  unfair  that  they  should  become  the 
property  of  individuals,  and  have  therefore  treated  them  as 
a  common  heritage,  exacting  a  rent  or  royalty  for  the  oppor- 
tunity to  exploit  them.  This  is  perhaps  generally  the  case 
to-day  on  the  continent  of  Europe ;  but  EngHsh  law,  with 
its  inclination  to  emphasize  private  rights,  has  by  contrast 
fostered  the  idea  that  he  who  owns  the  surface  owns  down- 
ward to  the  center  of  the  earth  and  upward  to  the  sky. 


138      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  Law  of  Diminishing  Returns  from  Natural  Agents.  — 
One  of  the  most  fundamental  and  far-reaching  laws  in  eco- 
nomics is  that  which  describes  the  result  of  investing  labor 
and  capital  upon  land  or  other  natural  agents.  This  law, 
known  as  the  laio  of  diminishing  returns,  will  repay  careful 
thought  and  study.  We  may  profitably  begin  our  study  of 
the  law  in  its  application  to  agriculture. 

Every  farmer  is  naturally  desirous  of  reaping  the  largest 
possible  return  from  his  expenditure  of  labor  and  capital 
upon  his  land.  Yet  this  very  statement  implies  that  there 
is  a  limit  beyond  which  further  expenditure  will  be  unprofit- 
able. Let  us  see  why  this  limit  exists,  and  how  it  is  deter- 
mined. Suppose  the  case  of  an  acre  of  land  which  a  farmer 
intends  to  "  put  into  "  potatoes.  The  field  would  yield 
some  crop  even  if  it  were  hurriedly  and  poorly  plowed,  if  no 
fertilizer  were  used,  and  no  care  were  taken  to  prevent  the 
growing  vines  from  destruction.  Yet  the  farmer  knows  that 
further  expenditure  of  labor  and  capital  wiU  result  in  a 
much  larger  crop,  and  that,  if  prices  are  good,  the  increased 
crop  will  fully  repay  the  increased  outlay.  If  we  were  to 
inquire  more  particularly  from  the  farmer  as  to  his  opinion 
regarding  the  possibilities,  we  might  get  from  him  something 
like  the  following  estimate :  — 


An  Investment  of 

Would  Give  a  Total 
Return  of 

Or  an  Average  per 
Dollar  Invested  of 

S  5 

40  bushels 

8  bushels 

10 

100  bushels 

10  bushels 

15 

165  bushels 

*.jll  bushels 

20 

200  bushels 

10  bushels 

25 

225  bushels 

9  bushels 

30 

240  bushels 

8  bushels 

35 

245  bushels 

7  bushels 

THE   FACTORS   OF   PRODUCTION  139 

Let  us  stop  for  a  moment  to  consider  carefully  what  the 
table  means.  In  the  first  column  investment,  of  course, 
means  dollars*  worth  of  labor  and  capital  expended  in  culti- 
vating the  acre.  Hence,  if  at  a  particular  point  the  farmer 
gets  a  product  that  sells  for  an  amount  of  money  equal  to 
the  investment,  he  will  have  been  repaid  fully  for  his  work 
and  waiting.  Moreover,  the  investment  may,  for  the  sake 
of  simplicity,  be  thought  of  as  at  the  date  of  the  sale  of  the 
product,  thus  including  an  allowance  for  accrued  interest 
on  the  labor  and  capital  applied  to  the  acre.  But  the  num- 
bers in  this  column  do  not  include  any  payment  for  the 
use  of  the  land,  since  we  are  here  considering  only  the 
cost  of  cultivation;  moreover,  as  will  later  appear,  our 
present  study  will  show  us  how  and  why  anything  can 
be  paid  for  the  use  of  an  acre  of  land,  and  how  much  can 
be  so  paid  under  any  given  conditions.  The  numbers  in 
the  third  column  are  the  quotients  obtained  by  dividing 
the  corresponding  numbers  in  column  two  by  those  in 
column  one.  With  this  explanation  of  the  table,  let  us 
now  return  to  it  to  discover  how  it  illustrates  the  law  of 
diminishing  returns. 

An  examination  of  the  figm-es  will  show  that  doubling  the 
expenditiu-e,  from  $5  to  $10,  results  in  more  than  doubling 
the  product,  and  that  similarly  the  increase  in  the  product 
is  more  than  proportionate  to  the  increase  in  expenditure  in 
the  case  following.  But  notice  that  when  the  expenditure  is 
increased  from  $15  to  $20,  —  an  increase  of  one-third,  —  the 
increase  in  the  product  is  only  from  165  bushels  to  200 
bushels,  —  or  oniy  a  little  more  than  one-fifth,  —  and  that 
in  the  same  way  in  the  following  case,  increasing  the  expendi- 
ture by  one-fourth  results  in  an  increase  of  product  of  only 
one-eighth,  and  so  on.  In  other  words,  up  to  a  certain  point, 
—  here  represented  by  the  $15  investment,  —  an  increase  of 


140     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

expenditure  results  in  a  proportionate  or  more  than  propor- 
tionate increase  in  return,  while  after  that  point  has  been 
reached,  further  increase  in  expenditure  results  in  less  than 
a  proportionate  increase  in  the  return.  If  it  were  not  for  this 
fact,  there  would  be  no  limit  to  the  amount  of  labor  and  capi- 
tal which  the  farmer  could  profitably  employ  in  the  cultiva- 
tion of  the  acre  of  land.  And  the  fact  that  farmers  are  every- 
where strictly  limited  as  to  the  amoimt  of  such  profitable 
expenditure  is  in  itself  complete  proof  that  such  a  point  of 
diminishing  returns  exists  in  the  application  of  labor  and 
capital  to  natural  agents. 

In  the  table  the  least  average  cost  of  production  appears  to 
be  at  or  near  the  investment  of  fifteen  dollars,  and  the  single 
bushel  produced  at  least  cost  appears  to  be  at  the  same  point, 
so  far  as  the  numbers  given  indicate.  But  if  the  intervals 
between  successive  assumed  investments  were  made  suffi- 
ciently small,  it  would  be  found  that  the  point  of  least  aver- 
age cost  and  the  point  of  least  cost  for  the  last  or  marginal 
bushel  w^ould  not  coincide.  For  when  the  bushel  of  least 
cost  has  been  reached,  it  will  be  found  that  the  next  succeed- 
ing bushel,  though  costing  more  than  the  one  before,  never- 
theless costs  less  than  the  average  of  all  produced  up  to  that 
point,  and  hence  its  inclusion  with  those  gone  before  will 
lower  the  average.  The  point  of  least  average  cost  —  some- 
what beyond  the  point  of  least  marginal  cost  —  is  really  the 
point  of  diminishing  returns;  but  in  the  table  no  difference 
is  apparent,  and  it  will  rarely  be  of  practical  importance  to 
note  such  a  difference.  Hereafter  we  shall  disregard  it,  un- 
less some  practical  consequence  is  involved. 

It  will  appear  on  reflection  that  the  farmer  will  not  neces- 
sarily discontinue  his  expenditure  upon  the  land  at  the  point 
at  which  the  product  begins  relatively  to  diminish.  The 
limit  of  pro/Uahle  expenditure  —  or  intensive  margin  of  cul- 


j  THE   FACTORS  OF   PRODUCTION  141 

tivation — will  depend  upon  the  expected  price  of  the 
product.  Thus  at  a  price  of  ten  cents  a  bushel,  the  farmer 
would  lose  absolutely  in  all  except  the  second,  third,  and 
fourth  cases  in  our  illustration,  and  he  would  make  a  surplus 
only  in  the  third  case.  At  a  price  of  nine  cents  a  bushel, 
he  could  not  afford  to  raise  the  crop  at  all.  On  the  other 
hand,  at  a  price  of  one  dollar  a  bushel  he  could  afford  to 
expend  $35  upon  the  acre,  since  the  last  $5  of  expenditure 
would  yield  a  return  of  five  bushels,  which  would  sell  for 
enough  to  repay  him  for  the  marginal  labor,  materials,  etc. 
We  may,  therefore,  say  that  there  are  two  ways  in  which 
the  proportion  of  returns  diminishes  as  expenditure  increases : 
there  is  a  diminishing  return  from  the  point  of  view  of  the 
prodvjctj  and  there  is  a  diminishing  return  also  from  the  point 
of  view  of  the  value  of  the  product.  The  second  is  of  course 
decisive  with  the  farmer,  but  this  itself  is  due  to  the  diminish- 
ing return  measured  in  terms  of  the  product. 

A  further  point  remains  to  be  particularly  noted.  An 
imperfect  understanding  of  the  nature  of  the  law  has  led  at 
times  to  the  conclusion  that  as  population  increases  it  must 
inevitably  become  increasingly  harder  to  secure  the  means  of 
subsistence  from  the  soil.  But  this  conclusion  is  at  variance 
not  only  with  the  known  facts  of  the  history  of  society,  but 
also  with  the  law  itself  when  the  law  is  properly  stated. 
Such  a  conclusion  would  indeed  be  valid  if  the  point  of 
diminishing  returns  remained  everywhere  at  the  same  point 
from  year  to  year  and  from  generation  to  generation.  But 
we  all  know  how  far  from  the  truth  this  last  assumption  is. 
The  art  of  agriculture  is  constantly  improving  as  a  result  of 
invention  and  the  discovery  of  better  methods  and  processes, 
and  every  improvement  makes  it  possible  to  secure  a  greater 
crop  without  a  greater  expenditure;  in  other  words,  every 
suxih  improvement  pushes  forward  the  point  of  diminishing 


142     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

returns.  The  law  of  diminishing  returns  still  holds  true. 
There  is  still  and  always  a  point  beyond  which  further  invest- 
ment of  labor  and  capital  upon  an  acre  of  land  will  yield  a 
less  than  proportionate  return,  but  that  point  is  not  now 
reached  so  soon  as  before. 

We  are  now  ready  for  a  formal  statement  of  the  law  we 
have  been  discussing.  At  any  given  time,  there  is  a  point  in 
the  investment  of  labor  and  capital  upon  a  unit  of  any  natural 
agent  beyond  which  further  investment  yields  a  less  than  pro- 
portionate return. 

We  have  taken  for  our  illustration  the  case  of  labor  and 
capital  expended  in  agriculture.  But  the  law  is  equally 
true  of  the  expenditure  of  labor  and  capital  upon  land  or 
other  natural  agents  in  the  case  of  mining,  manufactur- 
ing, and  commerce.  The  only  difference  is  that  in  these 
industries  greater  amounts  of  labor  and  capital  may  be 
expended  upon  a  given  unit  of  land,  —  say  an  acre,  — 
before  the  point  of  diminishing  returns  is  reached,  than  is 
the  case  in  agriculture. 

The  above  statement  of  the  law  of  diminishing  returns  is 
the  one  that  has  been  most  used  in  economic  analysis ;  and 
this  form  of  the  law  will  always  be  meant  when  reference  is 
made  to  such  a  law,  unless  otherwise  expressly  stated.  But 
it  is  possible  to  look  upon  the  law  of  diminishing  returns  from 
other  points  of  view  than  that  adopted  here.  For  example, 
instead  of  taking  an  acre  of  land  as  a  unit  and  supposing  suc- 
cessive amounts  of  labor  and  capital  to  be  applied  to  it,  we 
might  have  considered  the  farmer  himself  as  the  unit,  giving 
him  successive  amounts  of  land,  labor,  and  capital  to  manage. 
In  this  case  we  should  also  have  found  at  first  an  increasing 
and  then  a  diminishing  return.  And  in  like  manner,  we 
might  consider  the  effect  of  combining  increasing  "  doses  " 
of  land  and  labor  with  a  fixed  amount  or  unit  of  capital. 


I 

THE   FACTORS  OF   PRODUCTION  143 


Law 

Definition.  —  The  second  of  the  primary  or  original  fac- 
tors in  production  is  labor.  Labor  is  human  exertion  of  mind 
or  body  undergone  with  the  object  of  creating  utilities. 

A  common  classification  distinguishes  mental  from  phys- 
ical labor.  In  making  this  distinction  it  is  well  to  bear  in 
mind  that  from  the  purest  instance  of  mental  labor  to  the 
purest  instance  of  physical  labor  there  is  always  some  mixing 
of  both  forms.  The  philosopher  must  labor  with  hand  or 
tongue  if  he  would  give  the  results  of  his  thought  to  the 
world,  and,  on  the  other  hand,  even  the  ditch  digger  can  by 
no  means  do  his  work  without  the  exercise  of  intelligence. 

We  must  never  forget  that  labor  is  not  an  end  in  itself ^ 
but  is  only  a  means  to  an  end,  the  satisfaction  of  wants. 
With  this  thought  firmly  fixed  in  mind,  it  will  not  be  diflS- 
cult  to  understand  that  increase  of  labor,  unless  it  means  in- 
crease of  human  satisfactions,  is  not  socially  desirable. 
Breaking  window  panes  makes  a  chance  for  labor,  but  it 
does  not  increase  human  satisfactions  as  a  result  of  that 
labor.  On  the  other  hand,  labor-saving  devices,  while  they 
may  injure  individual  laborers,  are  beneficial  to  society  as 
a  whole,  since  they  enable  it  to  secure  greater  satisfactions 
by  the  same  exertion. 

A  Nation's  Labor  Force.  —  A  question  of  prime  impor- 
tance in  connection  with  labor  is  that  of  the  conditions  affect- 
ing the  total  amount  of  a  nation's  labor,  —  what  might  be 
called  the  nation's  labor  force.  What  determiaes  this  ?  Evi- 
dently it  is  not  mere  numbers,  since  a  hundred  workers  in 
one  country  often  furnish  much  more  labor  to  production 
than  do  a  hundred  workers  in  another.  Analysis  of  the 
subject  shows  that  the  two  main  determining  factors  are 
(I)  efficiency  and  (II)  quxintity.    The  efficiency  of  labor  de- 


144     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

pends  in  turn  first  of  all  upon  {1)  the  efficiency  of  the  workers 
themselves,  —  upon  their  characteristics,  mental,  physical, 
and  moral.  Temperance,  trustworthiness,  skill,  alertness, 
quick  perception,  comprehensive  mental  grasp ;  —  all  these 
good  qualities  minister  to  the  eflSciency  of  the  workmen,  and 
hence  of  labor.  In  the  formation  of  these  qualities  the  phys- 
ical and  social  environment  in  which  the  laborers  are 
reared  and  do  their  work  is  of  the  greatest  importance. 

(2)  The  second  influence  conditioning  the  efficiency  of  labor 
is  the  manner  in  which  it  is  organized  and  directed.  As  we 
are  to  discuss  this  separately  and  at  some  length  in  the  next 
chapter,  we  need  note  here  only  that  when  labor  is  carefully 
organized  and  directed,  so  that  each  worker  can  do  con- 
tinuously the  work  for  which  he  is  best  fitted,  the  labor  by 
that  means  becomes  indefinitely  more  efficient. 

(II)  The  second  factor  in  determining  a  nation's  labor 
force  is  its  amount  or  quantity.  This  again  depends  partly 
(1)  upon  the  aggregate  number  of  hours  during  which  laborers 
work,  varying  with  the  length  of  the  working  day,  the  num- 
ber of  holidays  in  the  year,  etc.  A  ten-hour  working  day 
means  a  greater  quantity  of  labor  than  an  eight-hour  day, 
and  therefore  a  greater  labor  force,  provided  the  efficiency  is 
not  proportionately  impaired  by  the  long  hours  of  work.  A 
nation's  labor  force  undoubtedly  increases,  other  things 
being  equal,  (2)  with  the  growth  of  population,  which  means 
a  possible  increase  in  the  number  of  laborers. 

The  Malthusian  Theory.  —  Now,  to  the  growth  of  popu- 
lation there  is  no  absolute  limit  save  that  presented  by  the 
means  of  subsistence  which  can  be  secured.  Throughout 
recorded  history  we  again  and  again  find  the  population  of 
one  country  and  another  increasing  to  the  starvation  point ; 
i.e.  increasing  until  the  means  of  subsistence  were  less  than 
sufficient  for  all  who  had  been  born.    From  this  fact  has 


I  THE   FACTORS   OF   PRODUCTION  145 

arisen  a  fear  lest  this  over-population  shall  always  repeat 
itself  in  the  future  as  it  has  in  the  past.  Those  who  are 
much  moved  by  such  a  fear  have  often  on  their  lips  the  theory 
called  Malthusianism,  from  the  name  of  an  Enghsh  econo- 
mist, Thomas  Robert  Malthus,  who  lived  and  wrote  at  the 
end  of  the  eighteer^h  century  and  the  first  third  of  the  nine- 
teenth century.  According  to  this  theory,  population  tends 
to  increase  in  geometrical  progression  (i.e.  by  multiplica- 
tion :  2-4-8-16  etc.),  while  the  best  that  we  can  hope  in  the 
case  of  food  is  that  it  may  increase  in  arithmetical  progression 
(i.e.  by  addition,  2-4-6-8-10  etc.).  Consequently,  if  there 
were  no  other  checks  upon  the  increase  of  population,  men 
would  soon  reach  the  point  of  starvation. 

Positive  and  Preventive  Checks  upon  Population.  —  It  is 
admitted  by  the  theory  that  such  checks  exist.  These  are 
of  two  kinds,  positive  and  preventive.  Positive  checks  are 
those  that  act  through  the  death  of  the  living,  —  checks  that  in- 
crease the  death  rate,  such  as  plagues,  pestilence,  intem- 
perance, infanticide,  cannibalism,  and  war.  These  positive 
checks  may  be  "  exclusively  misery,''  as  proceeding  unavoid- 
ably from  nature,  or  they  may  come  indirectly  from  vice 
that  leads  to  misery.  Preventive  checks  are  those  that  act 
through  a  lowering  of  the  birth  rate.  These  are  found  either 
in  vices  which  result  in  incapacity  for  parenthood,  or  in  what 
Malthus  called  prudential  restraint,  —  a  moral  check,  con- 
sisting in  the  postponement  or  avoidance  of  marriage,  or  of 
the  upbringing  of  a  family.  Conscientious  men  will  be  slow 
to  marry  unless  they  can  support  a  wife  and  rear  their  chil- 
dren worthily.  As  population  becomes  denser,  such  men 
find  the  burden  of  rearing  a  family  heavier,  and  therefore 
postpone  marriage  or  avoid  it  altogether.  With  every  in- 
crease of  the  average  age  at  marriage,  the  number  of  chil- 
dren born  decreases  more  than  in  the  same  proportion. 


146     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

Innumerable  customs  exist  all  over  the  world  which  have 
grown  up  from  the  social  need  of  checking  marriage  and 
population,  as,  for  instance,  the  custom  which  obtains  in 
some  peasant  communities  of  marrying  only  when  a  cottage 
becomes  vacant  by  the  death  of  its  former  occupant.  Mal- 
thus  himself  formally  deduced  only  this  lesson :  let  no  man 
marry  until  he  has  a  reasonable  prospect  that  he  will  be  able  to 
support  a  family  of  the  average  size.  He  wished  to  intensify 
in  Enghshmen  the  feeling  of  parental  responsibility. 

"  Prudential  Restraint."  —  It  might  be  thought  that  such 
prudential  restraint  will  come  to  be  operative  in  such  a  way 
as  easily  to  prevent  the  danger  of  over-population ;  but  Mal- 
thus  himself  often  forgot  the  hope  contained  in  man's 
gradual  enhghtenment,  and  took  a  gloomy  view  of  the 
future.  Others,  following  Malthus  in  his  gloomy  reasoning, 
have  thought  that  there  is  no  escape  for  the  race  from  re- 
peated over-population  with  all  its  resulting  vice  and  misery. 
Modem  civilization,  however,  gives  much  cause  for  hope 
that  as  prosperity  becomes  diffused  among  the  people,  the 
problem  of  over-population  may  lose  its  serious  aspect. 

Statistics  show  conclusively  that  everywhere  advancing 
civilization  has  been  accompanied  by  a  decline  in  the  birth 
rate.  This  decrease  in  the  birth  rate  seems  to  have  appeared 
first  in  France,  where  it  is  most  extreme,  and  to  have  shown 
itself  increasingly  in  later  years  there  and  in  other  countries, 
apparently  moving  from  the  well-to-do  classes  through  the 
artisan  class  and  towards  or  even  to  the  class  of  the  very 
poor.  In  large  though  varying  measure  the  tendency  ap- 
pears among  people  of  nearly  all  advanced  countries,  sec- 
tions, races,  religions,  and  social  classes,  though  interesting 
differences  are  observable.  How  far  the  tendency  is  a 
manifestation  or  an  extension  of  the  prudential  restraint  of 
which  Malthus  wrote,  is  still  to  some  degree  a  matter  of  dis- 


THE   FACTORS  OF   PRODUCTION  147 

pute,  discussion  of  which  would  be  beyond  the  just  limits  of 
an  elementary  text. 

Population  and  the  Standard  of  Living.  —  In  a  later  chap- 
ter, on  Wages  and  the  Labor  Problem,  we  shall  study  at 
some  length  the  influence  exerted  upon  population  by  the 
standard  of  living,  —  the  amount  of  necessaries,  comforts,  and 
conveniences  which  people  are  accustomed  to  enjoy.  Here  we 
may  just  pause  to  note  that  where  the  standard  of  living  is 
a  high  one  and  is  firmly  maintained,  anything  that  threatens 
it  will  set  in  operation  the  preventive  checks  to  which  we 
have  referred.  But  the  standard  of  living  is  not  absolutely 
fixed,  and  changes  in  population  through  the  action  of  pre- 
ventive checks  come  about  only  slowly.  It  may  therefore 
happen  that  when  the  standard  is  assailed  by  continued 
national  adversity,  the  rising  generation  may  be  brought 
up  to  accept  a  lower  standard,  according  to  which  a  greater 
increase  of  population  will  be  possible  and  natural.  Such  a 
possibility  represents  one  of  the  costs  of  war  that  has  been 
too  little  considered. 

The  Two  Sources  of  Increased  Population.  —  The  popu- 
lation of  any  country,  as  distinguished  from  the  whole 
world,  has  two  sources  of  growth,  —  natural  increase  and 
immigration.  Natural  increase  comes  about  in  any  country 
through  a  continued  excess  of  births  over  deaths;  in  other  words, 
through  a  birth  rate  which  on  the  average  exceeds  the  death 
rate.  Such  an  excess,  however,  may  result  from  any  one  of 
several  widely  differing  conditions.  Thus  some  countries, 
e.g.  Russia,  have  a  very  high  death  rate  with  a  still  higher 
birth  rate,  while  in  other  countries,  e.g.  England,  the  in- 
crease results  from  an  excess  of  a  low  birth  rate  over  a  still 
lower  death  rate.  It  is  evident  that  the  proportion  of  per- 
sons capable  of  labor,  and  hence  the  nation's  labor  force, 
will  be  greater  where  the  death  rate  is  low.    Manifestly,  too, 


148      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

it  makes  a  great  difference  in  the  real  happiness  of  a  country 
whether  the  increase  in  population  is  due  to  the  one  condi- 
tion or  the  other.  In  our  own  country,  population  has  in- 
creased with  wonderful  rapidity  for  over  a  century  both 
through  immigration  and  natural  growth.  Down  to  the 
beginning  of  the  Great  European  War,  iminigration  con- 
tinued to  increase  almost  without  a  break  from  year  to  year ; 
and  though  the  birth  rate  has  been  gradually  falling,  the 
death  rate  has  fallen  almost  as  steadily,  with  the  result  that 
natural  increase  of  the  population  has  been  uninterrupted. 

Capital 

Definition.  —  The  third  factor  in  production,  the  second- 
ary or  derived  one,  is  capital.  Itself  neither  land  nor  labor, 
capital  is  derived  from  the  two,  and  yet  is  a  new  thing  with 
properties  of  its  own.  In  everyday  speech  the  word  "  capi- 
tal "  is  often  used  loosely  to  describe  things  that  are  not 
capital  at  all  in  the  technical  language  of  economics.  Thus 
the  word  is  often  used  to  include  land,  because,  in  many  re- 
spects, to  the  man  engaged  in  a  business  enterprise  there  is 
little  difference  between  his  land  and  his  machinery.  Yet 
technically  the  two  should  be  sharply  distinguished.  Again, 
business  ability  is  often  described  as  personal  capital,  and 
there  is  a  certain  sense  in  which  this  figurative  expression 
has  a  value ;  but  it  should  always  be  remembered  that  such 
language  is  only  figurative.  Land  is  nature;  capital  is  a 
human  product.  Labor  is  indissolubly  connected  with  the 
personality  of  the  laborer ;  capital  is  a  material  thing  result- 
ing from  that  labor.  Even  more  frequently  in  everyday 
speech  do  business  men  use  the  word  capital  to  describe 
either  the  amount  or  value  of  the  capital  stock  of  a  corpora- 
tion, or  the  whole  value  of  a  going  business,  —  whether  in- 


THE  FACTORS  OF  PRODUCTION  149 

corporated  or  not,  —  including  land,  buildings,  stock  in 
trade,  accounts  receivable,  money  in  bank  and  in  till,  etc. 
Hence  the  sharp  caution  here  given  that  the  word  capital, 
as  used  by  the  economist  to  name  the  third  factor  in  pro- 
duction, consists  of  those  intermediate  products  which  are  used 
for  the  purpose  of  further  production.  \  More  briefly  still, 
capital  means  tlie  produced  instruments  of  production. 

Classes  of  Capital  Goods.  —  Capital  is  "  the  medium 
through  which  the  two  original  productive  powers  exert,  their 
instrumentality."  It  includes  not  only  all  the  (1)  man-made 
aids  to  production,  such  as  buildings,  machinery,  and  tools, 
but  also  all  those  (2)  unfinished  goods,  such  as  hides  and  bar 
iron,  which  enter  into  further  production ;  and  also  (3)  finished 
consumers'  goods,  so  long  as  these  have  not  passed  into  the  pos- 
session of  the  final  consumers,  but  are  still  having  added  to 
them  place  and  time  utilities.  Partly  manufactured  materials 
are  technically  spoken  of  as  in  the  "  process  of  ripening." 
Fully  "  ripened  "  goods  in  the  possession  of  final  consumers 
are  no  longer  to  be  regarded  as  capital,  although  from  their 
wise  use  new  capital  may  result. 

The  Function  of  Capital.  —  The  function  of  capital  may 
be  expressed  as  follows :  It  enables  men  to  utilise  more  com- 
pletely nature's  materials  and  forces  by  the  substitution  of 
roundabout  methods  of  production  for  direct  ones:  and  it 
accomplishes  this  result  by  furnishing  the  tools  for  such  round- 
about methods,  and  by  making  possible  a  longer  interval  be- 
tween the  initial  effort  and  the  final  effect,  or  consumption. 
Roundabout  methods  are  almost  without  exception  more 
efficient  than  direct  ones,  but  these  methods  require  tools 
or  machinery  and  a  len^hened  period  of  production.  Thus, 
a  man  may  lift  a  heavier  weight  by  the  roundabout  method 
of  using  a  lever,  instead  of  relying  upon  his  unaided  strength, 
since  in  this  way  he  summons  nature's  forces  to  his  aid. 


150      ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

And  generally  speaking  every  improvement  in  machinery 
means  a  more  roundabout  method  of  applying  labor.  Capi- 
talistic production,  therefore,  as  it  develops,  shows  a  con- 
tinual increase  in  the  number  of  steps  between  the  initial 
movement  and  the  final  product,  and,  as  a  general  rule,  an 
increase  in  the  length  of  the  interval. 

Improvements  sometimes  seem  to  shorten  processes,  but 
when  we  go  far  enough  back  in  our  studies,  we  find  that  the 
rule  given  above  is  in  general  correct  and  that  it  directs  at- 
tention to  one  of  the  most  remarkable  and  significant  prin- 
ciples of  capitalistic  production.  The  student  must  not  allow 
himself  to  fall  into  the  easy  mistake  of  confusing  the  last  stage 
of  the  capitalistic  or  roundabout  process  with  the  whole 
process.  A  ride  in  a  railway  train  means  more  than  taking  a 
seat  in  a  car  and  being  whirled  through  space.  It  means  the 
efforts,  reaching  back  through  years,  of  men  who  have  made 
roadbed,  bridges,  car,  and  engine;  the  earlier  forms  of 
capital  by  which  these  in  their  turn  were  made ;  and  so  on 
and  on  through  a  vista  of  years  that  tasks  the  mind  to  pene- 
trate. So  too,  in  watching  a  threshing  machine  at  work  we 
note  at  first  only  that  it  threshes  grain  rapidly,  but  we  have 
not  grasped  the  real  function  of  capital  in  this  case  until  we 
recall  the  innumerable  steps  involued  in  the  production  of  the 
machine  and  the  length  of  the  process  when  so  regarded. 
The  roundabout  methods,  of  course,  are  not  an  end  but  a 
means  to  an  end. 

The  Origin  of  Capital.  —  It  is  often  said  that  capital  is 
the  result  of  sa\dng,  but  such  a  statement  of  the  case  is  at 
least  misleading.  Saving,  as  such,  is  merely  negative  and 
cannot  produce  a  positive  result.  In  order  that  we  may 
save,  we  must  first  have  something  to  save,  —  that  is,  we 
must  produce,  —  and,  moreover,  we  must  produce  something 
more  than  is  suflScient  for  existence;    in  other  words,  we 


THE   FACTORS  OF   PRODUCTION  151 

must  have  a  surplus.  If  such  a  produced  surplus  is  laid  by 
or  saved,  it  may  become  capital. 

Methods  of  Capital  Formation.  —  Such  savings  do  become 
capital  when  they  are  devoted,  directly  or  indirectly,  to 
furthering  production.  One  of  the  simplest  ways  in  which 
saved  surplus  may  be  transformed  into  capital  would  be 
illustrated  by  the  case  of  a  fisherman  who  should  use  part 
of  the  catch  of  one  period  for  subsistence  while  in  a  later 
period  he  worked  at  a  canoe,  or  net,  or  other  device  for  in- 
creasing the  product  of  his  future  labor.  In  advanced  com- 
munities the  process  is  usually  much  more  complex.  The 
farmer,  for  instance,  who  wishes  a  self-binder,  pays  for  it 
directly  with  money.  But  the  money  has  been  received  in 
return  for  a  saved  surplus  of  his  farm  products.  Mean- 
while, those  who  have  been  working  on  the  manifold  pro- 
cesses which  result  in  the  finished  farm  machine,  have  been 
supported  from  a  surplus  which  has  been  advanced  to  them. 
The  case  is  the  same  with  the  manufacturer.  He  may  sell 
his  products  and  consume  at  once  the  resulting  means  of 
livelihood  or  he  may  consume  less  than  all,  and  with  his 
remaining  means  may  purchase  from  others  the  forms  of 
capital  of  which  he  stands  in  need.  Or,  having  all  the 
machinery  needed,  he  may  invest  his  surplus  in  the  stock 
of  some  company,  in  which  case  the  company  will  use  it 
for  the  purchase  of  needed  capital  goods.  In  all  these  cases 
the  use  of  money  obscures  the  nature  of  the  transaction, 
which  is  at  bottom  only  the  turning  of  a  part  of  society's 
labor  force  from  the  production  of  finished  consumption  goods 
to  the  production  of  capital  goods  in  order  later  to  increase 
and  make  easier  the  production  of  consumers'  goods. 

Summing  up,  then,  we  may  distinguish  logically  the  fol- 
lowing steps  in  capital  formation :  (1)  production  beyond  the 
necessity  of  the  present;   (2)  postponemerd  of  the  consumption 


152     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

of  part  of  this  product;  (3)  use  of  the  saved  surplus  to  make  poS' 
sible  greater  future  production. 

Results  of  the  Use  of  Capital.  —  It  remains  for  us  to  say 
a  few  words  regarding  the  results  of  the  use  of  capital. 
First  of  all,  (1)  capital  makes  possible  an  increased  amount  of 
product.  Things  that  could  be  produced  by  hand  and  with- 
out capital  can  be  produced  in  much  greater  quantities  when 
capital  is  present.  In  the  second  place,  (2)  capital  makes 
possible  certain  goods  which  we  could  not  enjoy  at  all  without 
it.  Thus,  the  enjoyment  of  oysters  and  shellfish  at  great 
distances  from  the  coast  would  be  impossible  without  the 
capital  engaged  in  transportation.  Finally,  (3)  capital 
Tnakes  possible  in  many  cases  a  higher  quality  of  product  than 
could  exist  in  its  absence. 

Representative  Goods.  —  One  class  of  goods,  if  they  may 
be  so  called,  must  be  especially  distinguished  from  capital 
in  the  technical  sense  of  the  word.  We  refer  to  what  we 
have  earlier  called  "  representative  "  goods,  which  from  the 
point  of  view  of  society  are  not  goods  at  all,  but  only  signs 
of  the  ownership  of  goods.  Notes,  mortgages,  bonds,  and 
stock  certificates  are  not  social  goods ;  they  simply  represent 
ownership.  Neither  are  franchises  a  part  of  social  capital. 
When  a  city  grants  to  a  company  a  franchise  for  the  con- 
struction and  operation  of  a  street  railway,  it  does  not 
thereby  directly  create  new  capital.  It  merely  grants  per- 
mission to  the  company  to  make  use  of  existing  social  capital 
or  to  create  social  capital. 

Fixed  and  Circulating  Capital.  —  It  has  been  common 
among  economists  to  classify  capital  as  fixed  and  circulating. 
Circulating  capital  is  thai  which  can  be  used  but  once,  or  in 
one  round  of  operations,  its  value  parsing  once  and  for  all  into 
the  value  of  the  finished  product.  Fixed  capital,  on  the  other 
hand,  is  capital  which  lasts  through  a  succession  of  operations, 


^  THE   FACTORS   OF   PRODUCTION  153 

only  a  part  of  its  value  passing  over  into  the  product  with  each  use. 
Thus,  the  raw  materials  and  the  partly  finished  goods  used 
in  manufacturing  are  examples  of  circulating  capital,  while 
the  factory  building  and  the  machinery  are  fixed  capital. 

Free  and  Specialized  Capital.  —  A  classification,  which 
superficially  resembles  the  one  just  given,  but  which  is  really 
quite  distinct  from  it,  is  that  of  free  and  specialized  capital. 
Even  more  than  is  commonly  the  case  with  such  classifica- 
tions, these  words  must  be  understood  as  pointing  only  to 
relative  ideas.  Specialized  capital  is  that  which  by  its 
form  or  circumstances  can  be  u^ed  for  only  one  line  of  pro- 
duction, or  at  most /or  a  very  limited  number  of  such  lines  of 
production.  Free  capital,  on  the  other  hand,  is  capital 
which  can  be  applied  to  any  one  of  a  considerable  number  of 
lines  of  production.  Thus  coal,  iron,  and  leather  are  rela- 
tively free  forms  of  capital,  while  railways,  canals,  and  many 
forms  of  machinery  are  relatively  specialized.  The  prac- 
tical importance  of  the  difference  lies  in  the  fact  that  free 
forms  of  capital  can  more  readily  adjust  themselves  to 
changes  in  the  social  demand  for  goods.  Thus,  if  too  great 
an  amount  of  a  nation's  capital  is  converted  into  specialized 
forms,  —  into  railways,  for  example,  —  the  mistake  is  not 
easily  or  quickly  corrected,  and  the  entire  production  of  the 
country  must  suffer  in  consequence  of  the  bad  adjustment. 
Such  disproportionate  investment  of  capital  in  specialized 
forms  is  believed  by  some  economists  to  be  the  most  im- 
portant single  cause  of  crises  and  industrial  depressions. 

SUMMARY 

1.  Of  the  three  factors  of  production,  land  and  labor  are  primary 

and  original,  while  capital  is  secondary  and  derived. 

2.  Land  furnishes  "standing  room,"  natural  forces,  fertility,  and 

natural  treasures. 

3.  Labor  means  human  exertion  of  mind  or  body  undergone  with 

the  object  of  creating  utilities. 


154     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

4.  A  nation's  labor  force  depends  upon  its  efficiency  and  quantity ; 

efficiency  depends  upon  the  efficiency  of  the  individual 
laborers,  and  upon  the  efficiency  of  their  organization; 
quantity  depends  upon  aggregate  working  hours  and  number 
of  workers. 

5.  Capital  consists  of  intermediate  products  used  for  further  pro-  | 

duction.  '  ' 

6.  The  formation  of  capital  involves  saving  or  postponement  of 

possible  consumption. 

QUESTIONS  FOR  RECITATION 

1.  Mention  some  of  the  checks  upon  population.     How  does  the 

standard  of  life  affect  the  increase  of  population? 

2.  Why  should  land  be  distinguished  from  capital?     To  which 

class  does  a  building  upon  land  belong?  the  fertilizer  that 
was  used  five  years  ago? 

3.  What  advantages  flow  from  roundabout  processes  of  produc- 

tion ?  Mention  some  of  the  steps  in  the  development  of 
indirect  processes  in  the  production  of  wheat. 

4.  Distinguish  between  free  and  specialized  capital ;   between  fixed 

and  circulating  capital.     What  are  representative  goods? 

QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  In  what  sense  is  it  true  to  say  that  labor  produces  all  goods,  or 

that  capital  is  not  productive? 

2.  Is  capital  active  or  passive  as  regards  man?  as  regards  nature? 

3.  Is  tennis  for  recreation  to  be  classed  as  play  or  as  work  ?  amateur 

baseball?  professional  baseball?  burglary? 

4.  Discuss  America's  labor  force  from  the  point  of  view  of  the 

analysis  of  this  chapter. 

5.  What  is  the  effect  of  a  long-continued  high  rate  of  infant  mor- 

tality upon  the  proportion  of  workers  in  any  population? 

6.  Prepare  a  table  illustrating  the  law  of  diminishing  returns  in 

such  a  way  as  to  show  the  difference  between  the  minimum 
average  cost  and  the  minimum  cost  of  a  single  bushel. 

LITERATURE 

Clark,  J.  B. :   The  Distribution  of  Wealth,  Ch.  IX,  pp.  116-123. 

Commons,  J.  R. :    The  Distribution  of  Wealth,  Ch.  III. 

Fetter,  F.  A. :   Principles  of  Economics. 

Marshall,  A. :   Principles  of  Economics,  Bk.  IV,  Ch.  I,  §  1. 

Seager,  H.  R. :  Introduction  to  Economics. 

Seligman,  E.  R.  A. :   Principles  of  Economics, 

Taussig,  F.  W. :  Principles  of  Economics. 


CHAPTER  III 
THE  ORGANIZATION  OF  PRODUCTION 

In  the  preceding  chapter  we  have  considered  the  factors 
of  production  separately,  studying  the  nature  of  each,  and 
the  principles  governing  its  efficiency  and  increase.  We 
have  now  to  study  the  manifold  ways  in  which  production 
in  our  day  has  come  to  be  socialized  and  organized.  It  is 
as  though  we  had  studied  the  nature  of  the  various  parts  of 
a  machine,  and  were  then  to  study  further  the  different  ways 
and  methods  of  putting  the  parts  together,  and  to  learn  how 
the  resulting  whole  acted  as  a  unit  when  the  machine  was 
"  set  up." 

I.     Organization  of  the  Factors  Regarded  Collec- 
tively 

Early  Simplicity.  —  We  have  already  seen  that  the  three 
main  parts  of  the  great  machine  of  production  are  land^ 
labor,  and  capital ;  and  we  may  therefore  first  of  all  inquire 
how^  these  parts  are  "  assembled  "  for  efficient  work.  In 
other  words,  the  first  problem  in  our  present  study  is  that 
of  the  cooperation  or  organization  of  the  factors  of  produc- 
tion taken  together  or  collectively.  This  organization,  in  the 
early  stages  of  social  development,  was  exceedingly  simple. 
The  old  household  economy  was  so  organized  that,  if  it  were 
universal  to-day,  we  should  not  think  of  distinguishing  in  it 

155 


156      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  three  separate  factors.  The  same  man  owned  the  land, 
the  labor,  and  the  capital,  and  as  sole  judge  of  what  was 
right  distributed  the  total  product  among  those  who  aided 
in  production.  When,  with  advancing  civilization,  produc- 
tion came  to  be  carried  on  by  village  communities,  there  was 
collective  ownership  of  the  instruments  oi  jjfoduction  and 
management  by  a"common  authority,  and  the  distribution 
of  the  product  was  regulated  by  custom.  Later,  under  the 
/^m  organization  of  industry  and  comimerce,  there  was  a 
similar  lack  of  sharp  separation  of  the  factors.  The  early 
gilds  embraced  apprentice,  journeyman,  and  master,  and 
regulated  industry  and  commerce  under  governmental  super- 
vision. The  master  directed  the  business,  owned  the  capital, 
and  worked  with  his  own  hands.  He  received  the  entire 
product  of  the  business  after  supporting  the  apprentice  and 
paying  the  journeyman.  Labor  was  in  a  certain  degree  set 
off  from  the  other  factors,  but  the  separation  was  by  no 
means  complete.  The  man  who  at  any  time  supplied  labor 
looked  forward,  not  without  reason,  to  the  time  when  he  him- 
self in  turn  should  become  capitalist,  employer,  and  manager, 
for  such  advance  *jra,s^j^egular  part  of  the  gild  system. 

Growth  of  C3!^pl^i^  —  As  has  been  explained  in  earlier 
chapters,  the  last  one  hundred  and  fifty  years  or  so  have 
witnessed  a  great  change  in  the  organization  of  the  produc- 
tive factors.  Here  and  there  traces  still  survive  of  the  earlier 
simplicity,  and  one  great  branch  of  production,  agriculture, 
is  generally  carried  on  in  our  country  without  much  separa- 
tion of  the  ownership  of  the  factors..  A  large  proportion  of 
bur  smaii  farmers  own  the  land  they  cultivate  and  the  capital 
they  employ,  and  depend  wholly  or  in  great  part  upon  their 
own  labor  and  that  of  their  families  for  their  product.  But 
in  commerce,  marmfacturing,  and  transportation,  we  have 
as  a"ruIe^to-day  one  large  class  f urnishinglabor  only,  another 


THE  ORGANIZATION  OF   PRODUCTION  1^7 

class  furnishing  capital  and  sometimes  land,  and  a  third 
class  organizing  and  managing  business.  A  modern  railway 
corporation  serves  as  a  good  illustration  of  this.  The  holders 
of  the  bonds  and  stocks  furnish  the  capital,  and  receive  in 
return  interest  on  their  bonds  and  dividends  on  their  stock. 
Labor,  supplied  by  others,  is  paid  for  by  wages  and  salaries. 
The  land  is  also  regularly  supplied  by  the  bondholders,  being 
acquired  by  the  exchange  of  a  part  of  their  funds.  Conse- 
quently, we  have  rent  also,  though  this  does  not  usually 
appear  as  a  separate  item  in  railway  bookkeeping,  except  in 
those  cases  where  the  land  has  been  leased  instead  of  being 
purchased  outright.  Finally,  the  managers  and  directors  of 
the  business,  chosen  by  the  stockholders  from  their  own 
number  or  from  without,  constitute  a  separate  class  in  the 
organization. 

The  Entrepreneur.  —  It  is  easy  to  see  that  when  business 
organization  has  grown  so  complex,  some  central  guiding 
intelligence  is  necessary,  which  shall  overlook  the  whole 
field,  and,  after  deciding  what  things  shall  be  produced,  and 
in  what  quantities,  shall  provide  that  the  necessary  factors 
of  production  work  together  in  creating  the  product.  The 
man  who  does  this  usually  assumes  the  risk  of  loss  or  failure, 
and,  on  the  other  hand,  pays  a  stipulated  sum  to  those  per- 
sons or  classes  who  supply  him  with  the  factors  of  production. 

In  the  England  of  the  eighteenth  century  such  a  man  was 
called  an  "  undertaker  "  or  "  adventurer."  As  the  word 
"undertaker"  has  since  come  to  be  applied  to  one  small  and 
special  class  of  business  men,  and  as  the  word  "  adventurer  " 
now  carries  with  it  an  idea  of  rashness  or  even  dishonesty, 
the  French  word  "  entrepreneur,"  an  exact  equivalent  of  the 
word  "  undertaker,"  is  now  commonly  used,  though  in  recent 
years  the  name  "  enterpriser  "  or  the  figurative  title  "  Cap- 
tain of  Industry  "  is  frequently  used  instead. 


158      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  function  of  entrepreneurship  has  become  of  the  utmost 
ibaportance  in  modern  society,  and  seems  to  be  growing  in 
importance  with  every  increase  in  the  complexity  of  indus- 
trial organization.  The  entrepreneur  has  been  well  called 
the  "  Captain  of  Industry,"  since  it  is  he  who  marshals  and 
commands  the  industrial  forces,  and  more  than  any  one  else 
bears  the  responsibility  for  failure  or  success.  Business 
enterprises  under  able  leaders  achieve  brilliant  success  only 
to  languish  and  become  bankrupt  when  death  removes  the 
guiding  hand  and  brain.  Whole  towns  in  many  cases  depend 
for  their  prosperity  upon  a  few  shrewd  Captains  of  Industry. 
Possibly,  however,  the  importance  of  any  one  individual  for 
the  success  of  a  business  tends  on  the  whole  to  decHne  with 
growth  in  the  complexity  of  industry.  The  organization  of 
a  vast  modern  corporation,  with  its  large  directing  board 
and  its  many  executive  oflBcers,  seems  to  secure  an  imper- 
sonal stability  and  permanence  that  may  defy  the  chances 
and  changes  inevitable  in  the  life  and  work  of  the  single 
individual. 

The  function  of  entrepreneurship  is  so  important  in  modem 
industry,  and  the  services  of  the  entrepreneur  so  distinctive, 
that  it  might  almost  be  well  to  treat  the  entrepreneur  or 
entrepreneurship  as  a  fourth  factor  of  production,  in  addition 
to  those  explained  in  the  preceding  chapter.  Indeed,  when 
we  come  later  to  discuss  the  shares  of  social  income  secured 
by  the  various  factors,  we  shall  recognize  the  peculiar  and 
distinct  character  of  entrepreneurship  by  studying  its  sepa- 
rate share  under  the  name  of  profits. 

The  Forms  of  Business  Undertaking.  —  The  entrepreneur- 
ship  of  a  business  is  not  always  undertaken  by  a  single  in- 
dividual. On  the  contrary,  a  rapidly  increasing  volume  of 
business  is  coming  to  be  carried  on  in  forms  which  call  for 
^  division  of  the  function  or  functions  of  the  entrepreneur 


THE   ORGANIZATICi^  OF   PRODUCTION  159 

among  many  individuals.  The  following  are  among  the 
main  forms  of  business  undertaking  in  the  modern  world :  — 
^^A^  Thfi  Single.  F.ntrp/prprtPiir  Rysit>^  —  In  this  form  of  busi- 
ness, a  single  individual  owns  or  hires  the  capital  and  land, 
employs  the  labor,  directs  the  business,  and-b^ars  the  whole 
risk.  \    ^~~^ 

2.  Partner shv]^  —  In  the  case  of  a  partnership,  the  owner- 
ship, direction,  and  responsibility  are  shared,  sometimes  in 
unequal  proportions,  by  the  two  or  more  partners,  who  as  a 
rule  are  severally  liable  at  law  to  the  full  extent  of  their 
fortunes. 

3.  Business  Corporations^  —  This  form  differs  from  the 
■oregoing  chicly  in  the  fact  that  the  individual  responsibility 

of  the  members  of  the  corporation  is  limited  by  the  charter 
or  by  the  statutes  governing  such  companies,  and  in  the 
further  fact  that  there  is  no  necessary  legal  limit  to  the  life 
of  such  corporations.  On  account  of  the  magnitude  of  busi- 
ness transacted  under  this  form,  it  often  happens  that  the 
functions  of  entrepreneurship  are  divided,  the  shareholders 
owning  and  controlling  the  business,  and  bearing  the  risk, 
but  committing  the  active  management  to  elected  directors 
and,  through  the  directors,  to  hired  superintendents  and 
managers. 

One  of  the  most  striking  characteristics  of  the  industry  of 
the  United  States  during  the  last  fifty  years  has  been  the 
mighty  trend  from  individual  and  partnership  to  corporate 
ownership,  especially  in  the  fields  of  transportation,  mining, 
and  manufacture.  Transportation  has  passed  almost  com- 
pletely into  this  form.  Mining  is  not  far  behind.  In  manu- 
facture, according  to  the  thirteenth  United  States  census, 
corporations  reported  79  per  cent,  or  nearly  four-fifths,  of 
the  value  of  all  manufactured  products  in  1909.  Ten  years 
earlier,  65  per  cent  of  the  value  of  manufactures  had  been 


160     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

produced  by  corporations.  It  is  not  improbable  that  by  1920 
the  proportion  of  the  entire  value  of  manufactures  produced 
by  corporations  will  have  risen  to  90  per  cent.  In  agricul- 
ture the  tendency  is  so  slight  that  the  United  States  census 
has  made  no  study  of  the  forms  of  ownership.  But  it  is  a 
matter  of  common  knowledge  that  there  are  farms  owned 
and  managed  by  corporations. 

4.  Cooperative  Businesses.  —  In  what  is  technically  known 
as  coopCTatlve  proHuction,  the  workmen  combine,  —  under 
the  legal  form  of  partnership  or  corporation,  —  in  the  owner- 
ship or  control  of  the  other  factors  of  production,  share  all 
risks,  and  secure  direction  of  the  business  either  through 
their  own  members,  chosen  for  the  task,  or  through  regular 
salaried  managers.  This  form,  therefore,  in  its  legal  char- 
acter, cannot  be  distinguished  from  the  foregoing. 

5.  Government  Enterprise.  —  The  Federal,  state,  and  local 
governments  severaHy^owiTand  manage  many  businesses  of 
great  importance.  In  these  cases  the  people  as  a  whole  own 
the  business  and  bear  all  risks,  while  they  commit  the  direc- 
tion to  elected  or  appointed  managers. 

II.  The  Organization  of  the  Factor  Labor 

In  studying  the  forms  of  business  undertaking,  we  have 
really  been  studying  the  different  ways  in  which  society 
secures  cooperation  and  organization  of  the  factors  of  pro- 
duction as  a  whole.  We  have  now  to  study  the  ways  in 
which  the  factors,  considered  separately,  are  organized  for 
increased  efficiency.    And  first  as  to  labor. 

If  it  were  possible  to  conceive  of  a  people  among  whom 
every  individual  produced  for  himself  all  that  he  used,  ex- 
changing products  with  no  one,  we  should  have  an  example 
of  isolated  or  unorganized  labor  and  unorganized  production. 


THE   ORGANIZATION   OF   PRODUCTION         161 

But  there  is  no  evidence  that  such  an  extreme  state  of  things 
ever  obtained  anywhere.  Wherever  we  find  men  gathered 
together,  we  find  some  socialization,  some  organization  of 
their  efforts  to  secure  a  hving,  some  organization  of  the 
factor  labor. 

Forms  of  Organization.  —  1.  Simple  Associated  Effort.  — 
One  of  the  earliest  forms  of  organization  to  be  developed 
among  men,  and  one  that  still  plays  a  considerable  part  in 
the  economy  of  the  world,  is  that  which  has  been  named  simple 
associated  effort.  When  a  group  of  men  unite  their  efforts  in 
raising  a  heavy  weight,  or  two  men  beat  together  a  heated 
iron  or  work  a  saw,  we  have  illustrated  this  simple  form  of 
organization.  Sometimes,  as  in  the  first  of  these  cases,  the 
combination  is  to  effect  a  result  which  could  not  be  accom- 
plished at  all  by  the  single  individual.  Always  the  combina- 
tion results  in  a  greater  accomplishment  than  would  flow 
from  the  sum  of  the  efforts  of  the  several  individuals. 

2.  Division  of  Occupation.  —  With  advancing  civilization, 
industry  as  a  whole  has  been  more  and  more  broken  up  into 
parts,  and  the  parts  have,  therefore,  constantly  been  grow- 
ing smaller.  One  of  the  earliest  steps  in  the  organization  of 
labor,  perhaps  even  earlier  than  that  which  we  have  de- 
scribed above,  was  taken  when  the  members  of  primitive 
society  began  to  specialize  in  their  work.  And  the  whole 
story  of  society  since,  not  only  in  its  economic  phase,  but  in 
all  its  other  phases  as  well,  has  been  a  lengthening  tale  of 
increasing  specialization  of  work  or  function.  With  division 
and  subdivision  constantly  taking  place,  it  is  clearly  impos- 
sible to  recognize  or  name  all  of  the  stages  of  progress.  But 
two  of  these  stages  are  recognized  in  popular  speech  as  of 
distinct  character.  The  first  of  these  is  what  we  may  call 
division  of  occupations.  Probably  the  most  primitive  form 
of  such  division  was  that  by  which  among  savages  the  men 


162      ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

took  upon  themselves  the  functions  of  warriors  and  hunters, 
putting  upon  the  women  the  tasks  of  the  household  and  the 
field.  Division  of  occupations  is  indicated  by  the  names  of 
the  manifold  trades  or  callings. 

3.  Division  of  Labor.  —  The  further  subdivision  of  exist- 
ing occupations  has  been  largely  the  work  of  the  last  few 
centuries,  and  especially  of  the  last  two.  To  this  further 
subdivision  —  this  further  organization  —  of  labor  has  been 
given  the  technical  name  division  of  labor,  although,  as  we 
have  seen,  division  of  occupations  is  but  an  earlier  division 
of  labor  on  larger  lines.  This  form  of  organization  is  of 
such  prime  importance  in  modern  industry  that  it  calls  for 
detailed  and  careful  study. 

In  our  discussion  of  labor  as  a  factor  of  production,  it  was 
pointed  out  that  the  efficiency  of  labor  is  in  great  measure 
conditioned  by  the  efficiency  of  its  organization.  Such  effi- 
ciency of  organization  is  secured  in  the  highest  degree  through 
division  of  labor.  Division  of  labor  —  as  well  as  division 
of  occupations  —  might  perhaps  with  equal  propriety  be 
called  cooperation  of  labor.  Productive  processes,  especially 
in  manufacturing,  are  to-day  divided  into  minute  parts,  one 
part  or  perhaps  two  or  three  very  small  parts  being  given  to 
each  workman,  or  to  each  group  of  workmen.  Thus,  in  a 
modern  watch  factory,  one  workman  makes  one  small  part 
of  a  watch,  another  a  second,  and  so  on.  So  many  are  the 
divisions  of  the  process  of  watchmaking  that  it  has  been  said 
that  no  fewer  than  300  workmen  are  required  for  the  efficient 
working  of  such  an  establishment.  In  the  same  way,  in- 
stead of  one  man  performing  all  the  operations  in  the  mak- 
ing of  a  boot,  as  was  once  the  rule,  we  have  to-day  a  front 
cutter,  back  cutter,  back-stay  cutter,  top  cutter,  facing 
cutter,  lining  cutter,  sorter  and  buncher,  size  and  case 
marker,  stay  skiver,  top  skiver,  crimper,  front  trimmer,  top- 


THE  ORGANIZATION  OF   PRODUCTION         163 

front  stitcher,  top-back  stitcher,  and  so  on  to  as  many  as 
113.  But  while  the  workmen  divide  the  processes  among 
themselves,  they  unite  in  producing  the  completed  article, 
and  hence  we  may  say  that  division  of  labor  implies  coopera- 
tion of  labor.  When  we  use  the  phrase  "  division  of  labor," 
we  are  looking  at  one  side  of  the  process ;  while,  when  we 
speak  of  cooperation  of  labor,  we  are  viewing  it  from  the  oppo- 
site side.  And  the  same  is  true  of  division  of  occupations. 
Division  of  Labor  Illustrated.  —  A  good  illustration  of  divi- 
sion of  labor  is  afforded  by  the  needle-making  industry  as  it 
is  generally  conducted  to-day.  Steel  wire,  which  is  itself  the 
product  of  highly  divided  labor,  is  the  raw  material  of  the 
needle  factory.  All  needles  pass  through  the  same  general 
list  of  processes.  These,  as  the  visitor  to  the  factory  may 
view  them,  are  in  outline  as  follows :  The  wire  is  first  put 
through  a  machine  called  the  straightener  and  cutter,  which 
removes  all  bends  in  the  wire  and  cuts  it  into  pieces  about 
one-third  the  length  of  the  finished  needle.  These  short 
pieces,  called  blanks,  are  placed  in  small  iron  cylinders,  which 
are  rotated  in  such  a  manner  as  to  keep  the  wire  in  constant 
motion  under  friction.  They  are  thus  freed  from  scale  and 
dirt,  and  are  ready  for  "  cold  swaging."  For  cold  swaging, 
the  blanks  are  put  into  a  hopper,  from  which  they  are  taken 
by  machinery,  one  at  a  time,  and  held  so  that  one  end  is 
presented  to  the  action  of  a  set  of  revolving  sectional  steel 
dies.  By  the  constant  opening  and  shutting  of  these  rotating 
dies,  the  end  is  compressed  and  drawn  out  to  form  the  needle 
"  blade."  After  the  swaging  is  finished,  another  bit  of  ma- 
chinery is  made  to  stamp  upon  the  flattened  surface  of  the 
needle  a  number  or  mark,  which  indicates  what  sort  of  needle 
it  is  finally  to  be.  Inequalities  are  next  remedied  by  trimming 
all  blanks  to  a  uniform  length.  When  the  blanks  have  been 
trimmed  and  stamped,  they  are  taken  to  a  grooving  machine, 


164      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

by  which  a  short  groove  on  one  side  of  the  needle  and  a  long 
groove  on  the  other  side  are  made  simultaneously.  The 
needle  is  now  ready  for  its  eye.  Women  are  usually  anploj'ed 
in  this  process,  which  calls  for  a  high  degree  of  manual  dex- 
terity and  keen  sight  in  controlling  the  blanks  as  they  are 
"  fed  "  through  the  machine.  One  g^l  with  modem  ma- 
chinery can  punch  about  seven  thousand  needle-eyes  a  day, 
or  more  than  a  dozen  a  minute.  The  needles  are  next  given 
their  points  by  machines,  which  differ  according  to  the  Idnd 
of  point,  as  "  round,"  ''  twist,"  ''  diamond,"  etc.  So  far  as 
shape  is  concerned  the  needles  are  now  complete;  but  the 
softness  of  the  steel  up  t>o  this  pKDint  makes  them  useless  for 
practical  purposes.  They  must  therefore  be  hardened  and 
tempered,  and  this  in  turn  requires  several  distinct  processes 
and  opportunities  for  divided  labor.  Next  they  are 
sharpened  and  polished  by  z  piece  of  machinery  which  holds 
nearly  a  hundred  of  them  at  once  against  a  brass  wire  scratch- 
brush  revohing  8000  times  a  minute,  and  afterward  against 
a  bristle  brush.  The  eyes  of  the  needles  are  then  smoothed 
by  stringing  the  needles  on  a  cotton  thread,  covered  with  oil 
and  emerj",  which  is  drawn  back  and  forth  at  different  angles 
to  the  needles  so  that  the  polishing  pwwder  acts  on  all  pa-"  - 
of  the  aperture.  Next  follow  finish  pointing,  —  done  on  a 
fine  emer\%  —  and  finish  polishing,  done  by  a  revohdng  brush 
with  crocus  and  alcohol.  Counting  and  packing  offer  still 
further  opportunities  for  di\'ided  labor,  by  which  the  utmost 
economy  of  energ>'  is  adiieved. 

The  Advantages  of  Division  of  Labor.  —  It  has  been  usual 
for  economists  to  enumerate  the  advantage  of  the  di\'isior! 
of  labor  as  follows :  Rrst  of  all,  it  secures  (1)  a  gain  or  «ir?  •  ; 
in  time.  This  gain  in  time  is  twofold,  (a)  The  workman 
does  not  ha\^  to  pass  so  frequently  from  one  operation  to 
another,  and  (6)  he  can  learn  his  ^lectal  process  in  less  time. 


I 


THE   ORGANIZATION  OF   PRODUCTION  165 

In  the  second  place,  division  of  labor  secures  (2)  a  gain  in 
skill.  In  the  third  place,  the  system  results  in  (3)  a  gain 
in  adaptation,  by  finding  a  place  for  everyone  and  putting 
everyone  in  his  place.  The  man  who  is  physically  or  mentally 
strong  can  devote  his  whole  time  to  work  that  is  worthy  of 
him,  while  the  man  who  is  weak  in  muscle  or  in  mind  can 
find  work  in  which  great  powers  would  in  part  be  wasted. 
In  the  fourth  place,  division  of  labor  secures  (4)  a  gain  by 
paving  the  way  for  invention.  The  processes  being  rendered 
simple,  the  individual  workman  can  make  himself  more 
familiar  with  them,  and  can  therefore  see  where  and  how 
improvements  can  best  be  made.  It  therefore  results  that 
an  ever  increasing  proportion  of  modern  inventions  come 
from  the  brains  of  the  workmen.  In  this  view  of  things,  we 
may  say  that  invention  is  becoming  more  and  more  a  social 
process.  Finally,  division  of  labor  secures  (5)  a  gain  through 
a  more  complete  utilization  of  capital.  Each  workman,  using 
one  tool  or  one  set  of  tools,  or  operating  one  machine,  keeps 
the  capital  employed  all  the  time. 

Disadvantages  of  Division  of  Labor.  —  But  division  of 
labor  has  also  its  dark  side.  First  of  all,  the  system,  by 
making  possible  and  profitable  the  employment  of  women 
and  children,  (1)  often  deprives  men  of  their  employment  and 
leads  to  the  exploitation  of  women  and  children.  In  American 
cities,  one  may  sometimes  find  fathers  at  home  "  keeping 
house,"  while  their  wives  and  children  are  working  long 
hours  in  factories.  In  the  second  place,  division  of  labor 
(2)  gives  rise  to  a  dependence  of  man  upon  man  that  is  often, 
at  least  in  part,  an  evil.  Thus  a  strike  by  a  particular  group 
of  men  in  one  business,  —  mining,  for  instance,  —  may  throw 
out  of  employment  not  only  all  the  other  men  in  that  busi- 
ness, but  also  thousands  or  tens  of  thousands  of  other  men 
whose  work  depends  upon  the  product  of  the  industry  in 


166     ELEMENTARY  PRINCIPLES  OF.  ECONOMICS 

which  the  strike  occurs.  The  same  sort  of  hardship  results 
from  division  of  labor  when  workmen  too  old  to  acquire  a 
new  trade  are  deprived  of  their  usual  employment  by  a 
change  in  the  conditions  or  methods  of  production.  Thus 
the  invention  of  the  typesetting  machine  threw  tens  of  thou- 
sands of  highly  skilled  and  highly  paid  craftsmen  out  of  em- 
ployment. These  evils,  to  be  sure,  right  themselves  in  the 
long  run ;  but,  as  one  writer  has  keenly  remarked,  the  long 
rim  is  too  long  for  the  ordinary  man,  whose  life  is  but  a  short 
run.  And  how  long  may  be  the  run  required  in  cases  where 
children  have  been  brought  up  in  homes  demoralized  by  the 
enforced  idleness  of  the  family  head?  A  third  evil  con- 
nected with  the  system  of  divided  labor  is,  that  by  it  (3)  labor 
often  loses  its  attractiveness  and,  at  the  same  time,  its  educa- 
tional value.  A  workman  who  makes  a  whole  watch  can 
acquire  such  love  for  his  work  as  makes  him  an  artist ;  but 
who  can  learn  to  love  the  mere  routine  of  putting  metal 
disks  under  the  face  of  a  die  for  ten  hours  a  day  ?  "  It  is," 
as  one  writer  has  well  said,  "  a  sad  thing  for  a  man  to  have 
to  testify  that  he  has  never  made  more  than  the  eighteenth 
part  of  a  pin." 

III.    The  Organization  of  the  Factor  Capital 

In  the  foregoing  discussion  of  the  organization  of  labor, 
it  will  perhaps  have  been  noticed  that  the  organization  of 
labor  is  intimately  associated  with  the  organization  of  capi- 
tal. That  division  of  labor  would  never  have  developed 
without  the  organization  of  capital  in  the  form  of  machinery 
which  is  characteristic  of  modern  industry,  is  well  illustrated 
in  the  description  of  divided  labor  in  the  needle  industry. 
We  need  not  concern  ourselves  further,  therefore,  with  a 
separate  consideration  of  the  organization  of  capital,  since 


\        -"HE  ORGANIZATION   OF   PRODUCTION  167 

what  has  been  said  of  the  one  apphes  with  only  minor 
changes  of  expression  to  the  other.  We  may  pass  at  once 
to  consider  the  factor,  land. 

IV.  The  Organization  of  the  Factor  Land 

Territorial  Division  of  Labor.  —  To  a  certain  extent  the 
same  is  the  case  with  the  organization  of  natural  agents  as 
with  the  organization  of  capital.  Labor  is  human  effort 
applied  to  natural  agents,  usually  aided  by  capital.  Organi- 
zation of  labor,  therefore,  generally  involves  at  the  same  time 
organization  in  the  use  of  natural  agents  and  capital.  But 
there  is  one  form  of  organization  of  production  that  is  so 
generally  conditioned  by  the  factor,  nature,  that  we  may 
well  treat  it  as  a  form  of  organization  of  the  natural  agents 
themselves.  The  two  names  most  commonly  applied  to  this 
form  of  organization  are  localization  of  indmtries  and  terri- 
torial division  of  labor.  As  with  the  division  of  labor,  so  with 
localization  of  industries,  the  tendency  is  toward  increasing 
specialization  of  function,  in  the  one  case  among  persons,  in 
the  other  among  places.  Thus  the  territorial  specialization 
by  which  country  districts  supply  the  towns  with  food,  re- 
ceiving manufactured  goods  in  exchange,  —  society  thus 
dividing  its  labor  into  country  work  and  city  work,  —  re- 
sembles the  primitive  division  of  occupations,  among  savages, 
into  man's  work  and  woman's  work.  And  the  finer  territorial 
specialization  by  which  certain  agricultural  regions  produce 
almost  exclusively  some  one  product  or  some  few  special 
products,  while  certain  manufacturing  centers  similarly  de- 
vote themselves  to  making  some  one  commodity  or  some 
few  commodities,  may,  in  the  same  way,  be  likened  to  that 
form  of  division  of  labor  which  we  have  described  at  length. 

The  twelfth  United  States  census  disclosed  many  interest- 


168     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

ing  illustrations  of  territorial  division  of  labor  or  localizaA 
tion  of  industry.  Thus,  more  than  half  the  gloves  of  the 
country,  measured  by  their  values,  were  reported  as  being 
made  in  the  adjoining  towns  of  Gloversville  and  Johnstown, 
in  east  central  New  York.  Moreover,  the  value  of  the 
gloves  manufactured  was  more  than  two-thirds  of  the  total 
value  of  all  products  manufactured  in  the  town  in  the  case 
of  Gloversville,  and  more  than  one-half  in  the  case  of  Johns- 
town. Troy,  New  York,  produced  nearly  three-fourths,  in 
value,  of  all  the  collars  and  cuffs  made  in  the  country,  and 
nearly  seven-tenths  of  all  the  manufacturing  workmen  in 
Troy  were  engaged  in  this  one  industry.  Philadelphia  made 
over  45  per  cent  of  the  country's  carpets.  Nine-tenths  of 
the  wage-earners  in  South  Omaha,  Nebraska,  were  engaged 
in  slaughtering  and  meat  packing.  The  thirteenth  census 
showed  that  territorial  division  of  labor  had  progressed  even 
further  than  in  1899. 

Among  the  causes  which  lead  to  such  localization  of  in- 
dustry the  following  are  probably  most  important :  (1)  iiear- 
ness  to  materials  J  (2)  nearness  to  markets ,  (3)  water  power , 
(4)  favoring  climate,  (5)  local  supply  of  the  kind  of  labor  needed, 
(6)  local  supply  of  investment  funds,  (7)  the_xn:Orn^jjiu7lL.siom 
by  an  early^jtart.  Inasmuch  as  most  of  these  causes  have 
to  do  with  geographical  considerations,  rather  than  with 
labor,  it  will  be  understood  why  we  have  treated  localization 
of  industries  as  a  form  of  organization  of  natural  agents, 
rather  than  as  a  phase  of  the  organization  of  labor. 

Just  as  advancing  civilization  brings  increased  specializa- 
tion or  division  of  labor,  so  we  may  expect  that  the  future 
will  witness  an  ever  growing  specialization  of  industry  on 
geographical  lines.  Increasing  stability  of  governments,  im- 
proved methods  of  rapid  transit,  the  breakdown  of  interracial 
antipathies  and  prejudices,  are  making  world  markets  possi- 


K         RGANIZATION  OF  PRODUCTION         169 

ble,  and  with  the  world  markets  will  come  a  condition  of  affairs 
in  which  every  country  and  every  section  of  every  comitry 
will  confidently  produce  to  the  utmost  those  goods  in  the 
production  of  which  it  enjoys  the  greatest  relative  advantage. 

V.  Conditions  Determining  the  Organization  jf 
Production 

We  have  already  noted  in  passing  one  or  two  of  the  condi- 
tions upon  which  depends  the  efficiency  of  organization  of  pro- 
duction. It  may  be  well  to  bring  them  together  at  this  point 
and  to  speak  at  the  same  time  of  an  even  more  important  fac- 
tor which  conditions  all  production,  no  matter  how  organized. 

1.  Extent  and  Character  of  the  Population.  —  Perhaps  first 
in  logical  importance  is  the  size  and  character  of  the  popu- 
lation. The  more  numerous  the  consumers,  the  greater 
must  be  the  supply  of  goods ;  and  the  greater  the  supply  of 
any  commodity,  as  a  general  rule,  the  more  minute  will  be 
the  organization  which  will  be  found  economically  profitable. 
This  idea  is  often  expressed  in  the  statement  that  "division 
of  labor  is  conditioned  by  the  extent  of  the  market." 

2.  Growth  of  Capital.  —  The  second  great  condition  of  the 
organization  of  industry  is  the  growth  of  capital,  whether 
in  the  form  of  machinery  or  in  the  form  of  means  of  trans- 
portation and  communication  and  exchange.  Improvements 
in  machinery  have  made  increased  specialization  and  organi- 
zation technically  possible,  while  railways,  telegraph  and 
cable  lines,  and  banks  have  widened  the  markets  and  have 
thus  made  such  organization  economically  possible,  that  is, 
profitable. 

3.  The  Character  of  the  Industry.  —  Not  all  industries  lend 
themselves  equally  to  some  of  the  kinds  of  organization  that 
we  have  described,  no  matter  what  the  population  or  the 


170     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

extent  of  capitalization.  Agriculture  has  hitherto  in  the 
main  defied  all  attempts  at  minute  division  of  labor.  Manu- 
facturing lends  itself  to  division  of  labor  in  the  highest  degree. 
Without  entering  into  a  discussion  of  all  the  technical  reasons 
for  this  difference,  we  may  say  that  the  main  requirement, 
within  the  industry  itself,  for  minute  organization  is  that 
the  different  processes  shall  permit  of  being  carried  on  simul- 
taneously. We  all  know  that  this  feature  of  industry  is 
characteristic  of  manufacturing,  and  that,  on  the  contrary-, 
it  is  almost  entirely  lacking  in  the  case  of  farming,  in  which 
dependence  upon  nature's  changes  necessarily  results  in  serial 
processes. 

4.  The  Character  of  the  Government.  —  A  fourth  condition 
of  efficiency  of  organization  is  the  character  of  the  govern- 
ment. Even  the  most  advanced  states  differ  in  many  ways 
in  structure  and  in  the  legal  conditions  which  they  enforce, 
but  all  civilized  states  secure  at  least  the  following  conditions 
of  efficient  organization  :  they  all  (a)  maintain  the  institution 
of  private  property;  (b)  protect  life  and  property  from  enemies 
without  and  within  the  nation's  borders;  (c)  create  and  maintain 
the  institution  of  contract;  and  (d)  participate  directly  in  indus^ 
try  in  cases  in  which  it  has  been  clearly  proved  thai  individuals 
mil  not  act  at  all  or  will  not  act  for  the  best  interests  of  industry 
as  a  whole.  Thus,  all  civilized  governments  maintain  coin- 
age systems,  regulate  weights  and  measures,  establish  and 
care  for  docks,  lighthouses,  and  roads,  and  maintain  a  con- 
sular service  in  foreign  lands. 

VI.   Large-scale  and  Small-scale  Production  Com- 
pared 

Modern  times  have  witnessed  a  wonderfully  rapid  growth 
in  the  average  size  of  the  individual  business.     Indeed,  the 


THE  ORGANIZATION   OF   PRODUCTION  171 

change  in  the  size  of  the  business  unit  during  the  past  half 
century  is  perhaps  as  striking  as  the  change  from  house 
industry  to  factory  industry  in  the  second  half  of  the  eight- 
eenth century.  The  movement  has  gone  so  far  and  is  still 
proceeding  so  rapidly  as  to  excite  very  general  fear  as  to  its 
social  consequences.  Certain  dangers  resulting  from  the 
consolidation  of  large  competing  corporations  will  be  dis- 
cussed elsewhere;  but  it  is  pertinent  at  this  point,  in  con- 
nection with  the  subject  of  the  organization  of  production, 
to  advert  briefly  to  the  advantages  claimed  for  large-scale 
production  and,  on  the  other  hand,  to  economies  open  to 
small-scale  producers  severally  or  in  cooperation. 

Advantages  of  Large-scale  Production.  —  The  advantages 
claimed  for  production  on  a  large  scale  resolve  themselves 
into  two  general  classes:  (1)  economies  in  making  goods, 
and  (2)  economies  in  marketing  goods.  As  to  the  first,  it  is 
claimed  that  in  production  on  a  large  scale  there  is  a  saving 
in  (a)  capital  cost,  per  unit  of  product,  both  in  fixed  and 
in  circulating  capital;  in  (6)  labor  cost,  owing  to  the  possi- 
bility of  more  efficient  organization ;  in  (c)  the  possibility  of 
making  improvements,  both  through  the  employment  of 
special  investigators  and  inventors,  and  through  the  com- 
parison of  methods  in  different  departments  of  the  same  fac- 
tory or  in  the  same  departments  of  different  factories  under 
the  same  ownership ;  in  (d)  the  cost  of  superintendem^e;  in 
(e)  the  utilization  of  waste,  as  is  instanced  by  the  Standard 
Oil  Company  and  the  large  beef  and  pork  packing  companies ; 
in  (/)  promding  their  own  aids  to  making  and  marketing,  — 
making  their  own  cans,  boxes,  etc.,  and  owning  railways  and 
steamship  lines,  etc.  In  businesses  enjoying  this  last  ad- 
vantage, we  have  examples  of  integration  of  industry  as  well 
as  of  concentration  of  industry. 

Among  the  second  class  of  advantages  claimed  for  large- 
m 


172     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

scale  production,  economies  in  marketing  the  goods,  are  the 
following :  (a)  economy  in  securing  trade,  through  advertis- 
ing and  commercial  travelers ;  (6)  economy  in  "  carrying  " 
stocks  of  goods,  a  relatively  smaller  stock  being  sufficient  to 
meet  the  fluctuations  in  demand ;  (c)  economy  in  getting  goods 
to  consumers,  through  the  power  to  secure  better  freight  rates 
for  large  shipments,  and  through  the  power  possessed  by  some 
concerns  to  avoid  "  cross  freights/'  —  that  is,  to  ship  goods 
always  from  the  nearest  point  of  supply  and  hence  to  avoid 
having  shipments  of  the  same  class  of  goods  pass  each  other 
on  their  way  to  consumers ;  {d)  economy  in  securing  a  foreign 
market,  through  the  greater  power  of  the  large  concern  to 
withstand  the  cutthroat  competition  common  in  ''  hard  times." 
Economies  open  to  Small-scale  Producers.  —  Against 
these  advantages  of  large-scale  production  may  be  set  the 
following  considerations  which  seem  to  promise  a  continua- 
tion of  a  considerable  measure  of  small-scale  production,  at 
least  in  certain  lines  of  industry :  (a)  First  of  all,  it  is  claimed 
by  experts  that  in  many  lines  of  business  a  plant  of  moderate 
size  is  the  'plant  of  really  maximum  efficiency  in  regard  to 
capital  and  labor  costs.  (6)  In  many  cases  the  advantage 
of  the  large-scale  business  in  the  matter  of  concentration  of 
power  is  neutralized  by  the  fact  that  modem  invention, 
especially  in  connection  with  electricity,  is  revolutionizing 
the  methods  of  distribution  of  power,  putting  the  small  manu- 
facturer more  nearly  on  a  level  with  his  greater  rival,  (c)  It 
is,  furthermore,  very  doubtful  whether  large-scale  producers 
can  secure  that  minute  and  economical  supervision  which 
characterizes  small-scale  industry ;  whether,  in  other  words, 
hired  managers  can  compete  in  this  regard  with  individual 
entrepreneurs  who  will  reap  all  gains  as  they  bear  all  risks. 
{d)  The  small  producer  has  a  distinct  advantage  in  his  greater 
power  to  knmo  the  personal  wants  of  his  market.     In  many  in- 


THE  ORGANIZATION   OF   PRODUCTION         173 

dustries  the  personal  element  plays  so  large  a  part  that  the 
small  pr6ducer  will  for  a  long  time  be  able  to  hold  his  own, 
even  if  he  cannot  oust  the  large  producer  from  the  field. 
Finally,  by  cooperation  of  neighboring  small  producers,  it  is  pos- 
sible to  secure  much  the  same  opportunities  as  to  (e)  invention 
and  improvement  of  processes  and  (/)  utilization  of  ''waste  "  that 
we  have  spoken  of  as  regularly  present  in  large-scale  industry. 

It  must  be  borne  in  mind  that  our  comparison  has  been 
between  small-scale  and  large-scale  production,  not  between 
small-scale  production  and  monopolized  production.  Mo- 
nopolized production  is  usually,  though  by  no  means  always, 
production  on  a  large  scale.  But  production  on  a  large  scale 
is  not  at  all  the  same*  thing  as  monopolized  production. 
Had  we  been  speaking  of  the  production  of  monopolized 
goods,  it  would  have  been  possible  to  add  many  to  the  list  of 
alleged  advantages  or  economies  in  production,  and  some  of 
the  advantages  of  which  we  have  spoken  would  in  the  case 
of  a  monopoly  have  been  much  more  marked  and  undisputed. 
Thus  in  the  matter  of  "  cross  freights  "  and  again  in  the 
case  of  advertising,  many  would  admit  advantages  in  the 
case  of  a  monopoly  who  would  deny  that  they  accrue  simply 
to  large-scale  production. 

This  whole  matter  of  the  relative  advantages  of  small- 
scale  and  large-scale  production  has  been  of  late  days  the 
subject  of  rather  acrimonious  debate,  and  can  by  no  means 
be  regarded  as  settled. 

VII.   FouK  Views  as  to  the  Right  Relation  of 
Society  toward  Trusts 

Four  views  seem  logically  possible  as  to  the  right  relation 
of  organized  society  to  the  great  industrial  concerns  which 
we  have  come  to  call  by  the  misleading  name  Trusts. 


174     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

First,  there  is  the  view  that  the  big  concern  is  in  ever> 
way  beneficent,  in  achievement  and  in  promise,  and  that 
society  should  keep  "  hands  off  " ;  that  those  immediately 
interested  in  these  businesses,  in  ownership  and  control, 
know  better  than  the  public  can  know  how  they  should  be 
managed,  and  that  any  social  injury  that  selfish  interest 
might  inflict,  —  if  such  injury  must  be  admitted  as  even  a 
possibility,  —  would  be  less  than  the  social  injury  sure,  in 
this  view,  to  result  from  the  bungling  of  an  ignorant  and 
planless  society.  This  view  is  found,  sometimes  expressed, 
more  often  implicit,  in  many  great  newspapers  and  other 
influential  sources  of  public  information,  and  is  urgently  and 
more  or  less  successfully  pressing  for  acceptance  in  the  coun- 
cils of  American  political  parties. 

The  second  view,  representing  another  phase  of  our  in- 
herited ideas,  is  that  Trusts  are  evil,  and  an  unnecessary 
evil;  that  they  have  grown  out  of  unscrupulous  force  and 
corruption  rather  than  from  economy;  that,  even  though 
possible  economic  gains  may  be  credited  to  them,  yet  such 
gains  cannot  for  a  moment  weigh  in  the  scale  against  the 
advantage  the  small  industry  has  always  secured  as  a  train- 
ing school  in  initiative,  business  morality,  individual  respon- 
sibihty,  —  in  short,  business  character.  Those  who  hold 
this  view  propose,  therefore,  that  the  strong  arm  of  society 
should  reach  out  to  tear  apart  these  giant  combinations  of 
our  day,  and  enforce  among  the  smaller  concerns  resulting 
from  the  dissolution  a  competition  like  that  "  our  fathers 
used  to  know."  This  view  to-day  has  relatively  few  open 
defenders,  but  among  its  champions  are  men  of  the  keenest 
intelligence  and  best  tested  public-mindedness.  Its  practical 
influence  upon  legislation  and  administration  has  been 
greater  than  the  number  of  its  advocates  would  lead  one  to 
predict. 


THE  ORGANIZATION   OP  PRODUCTION         175 

A  third  view  is  that  Trusts  are  primarily  products  of 
economy,  though  too  often  the  economy  has  been  reenforced 
by  fraud  and  force;  that  the  old  small-business  school  of 
character  must  be  supplemented  —  perhaps  at  some  future 
day  even  be  replaced  —  by  new  methods  of  training,  evolved 
from  the  conditions  of  our  own  time  and  better  suited  to 
those  conditions ;  that  the  economies  of  large-scale  produc- 
tion can  be  and  should  be  turned  to  the  advantage  of  con- 
sumers through  reduced  prices  rather  than  to  the  further 
enrichment  of  a  few  business  supermen  through  enhanced 
profits ;  and  that  if  society  is  not  now  wise  enough  or  strong 
enough  for  the  task,  our  ignorance  and  weakness  must,  at 
our  peril,  give  way  to  intelligence  and  strength ;  that  the 
rallying  cry  of  America  should  be,  not  efficiency  nor  democ- 
racy, but  efficient  democracy.  Those  who  hold  this  view 
therefore  advocate  a  policy  of  active,  constant,  complete 
regulation,  a  policy  that  has  gained  rapidly  in  popular  accept- 
ance and  in  practical  influence  during  the  opening  years  of 
this  century. 

The  fourth  view  —  that  of  the  Socialists  —  is  like  the 
third  in  asserting  the  economy  and  inevitability  of  "  trusti- 
fication." Socialists  would  go  even  further  and  claim  that 
what  has  happened  in  a  part  of  the  industrial  field  is  fated 
to  occur  universally.  But  to  the  socialist  the  proposal  to 
regulate  is  a  subject  for  pitying  smiles  or  smiling  pity.  Quis 
custodiet  custodes  f  If  we  can  save  ourselves  at  all,  if  we  can 
secure  for  ourselves  the  economies  of  large-scale  production, 
—  the  socialist  calls  it  "  socialized  production,"  —  we  can 
do  it  through  collective  ownership  and  management,  and  in 
that  way  alone.  Over  sixty  years  ago,  Karl  Marx,  the 
greatest  figure  in  the  socialist  movement,  saw  or  foresaw  the 
tendency  to  concentration.  His  followers  claim  for  his  pre- 
vision or  prediction  the  same  sort  of  glory  that  the  world 


176      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

accords  to  the  discovery  of  the  planet  Neptune,  which  was 
found  where  it  is  because  by  Leverrier's  calculation  it  had 
to  be  there. 

The  four  views  here  characterized  may  be  summarized 
more  briefly  as  follows :  (1)  Trusts  are  inevitable,  economical , 
and  beneficent,  and  will  be  most  beneficerdly  and  intelligently 
managed,  if  unregulated:  (2)  TruMs  are  not  inevitable,  eco- 
nomical, or  beneficent,  and  hence  should  be  compulsorily  dis- 
solved: (3)  TruMs  are  inevitable  and  economical,  but  in  the 
highest  degree  dangerous  unless  they  are  so  regulated  as  to  pre- 
vent abu^e  and  to  turn  their  economies  to  the  advantage  of  the 
public:  (4)  TruMs  are  inevitable  and  economical,  and  will  be- 
coTne  universal;  we  cannot  regulate  them;  we  mu^t  own  and 
operate  them;  if  we  cannot,  democracy  has  failed, 

SUMMARY 

1.  Growth  in  the  magnitude  of  industry  has  resulted  in  increased 

complexity  of  industrial  organization. 

2.  The  entrepreneur  directs  the  organization  of  the  factors,  but 

his  function  is  sometimes  shared  among  many  individuals. 

3.  Forms  of  organization  of  the  factor  labor  are  simple  associated 

effort,  division  of  occupations,  and  division  of  labor. 

4.  Organization  of  the  factor  nature  gives  rise  to  localization  of 

industry. 

5.  The  limits  of  profitable  organization  of  industry  are  the  size  and 

character  of  the  population,  the  amount  of  capital,  the  character 
of  the  industry  itself,  and  the  character  of  the  government. 

6.  In  some  industries  there  are  many  advantages  in  production 

on  a  large  scale.  Against  these  may  be  set  other  features  in 
which  the  small-scale  producer  may  hold  his  own,  or  even 
enjoy  an  advantage. 

7.  There  are  four  views  as  to  the  nature  and  origin  of  "trusts,"  and 

four  views  as  to  the  proper  attitude  of  organized  society  toward 
them. 

QUESTIONS   FOR  RECITATION 

\.  How  was  cooperation  of  the  factors  secured  before  the  Industrial 
Revolution  ?  To  what  extent  does  this  method  obtain  to-day 
in  advanced  nations? 


THE   ORGANIZATION   OF   PRODUCTION         177 

2.  Name  some  of  the  duties  of  an  entrepreneur. 

3.  Name  the  different  forms  of  business  undertaking.     Discuss 

them  from  the  point  of  view  of  their  relative  strength  and 
weakness. 

4.  How  does  di\ision  of  occupations  differ  from  division  of  labor? 

5.  State  the  advantages  of  the  division  of  labor ;  the  disadvantages ; 

the  advantages  of  large-scale  production;  the  economies 
available  to  small-scale  producers. 

6.  Why  does  not  farming  lend  itself  to  the  division  of  labor? 

QUESTIONS   FOR   STUDY   AND   DISCUSSION 

1.  Is  there  any  relation  between  the  increase  in  the  average  size 

of  business  units  and  the  recent  establishment  of  schools  and 
colleges  of  commerce,  administration  and  finance,  and  the 
like? 

2.  Is  there  a  relation  between  the  development  above  mentioned 

and  the  rapid  growth  of  trade-unions  ? 

3.  What  is  the  official  position,  if  any,  taken  by  the  different 

political  parties  with  regard  to  trusts? 

4.  Does   increasing   division   of   labor   furnish   an  jirgurnent   for--^ 

speciahzation  in  school  and  college  education,  orTthe  contrary  ?  ^> 

5.  Does  division  of  labor  make  for  fullness  of  life  and^^eaSthlJf 

character,  (a)  directly;    (6)  indirectly? 

6.  Make  a  study  of  the  wonderful  division  of  labor  in  a  Chicago 

abattoir. 

7.  Describe  the  processes  under  a  system  of  divided  labor  in  some 

industry  with  which  you  are  acquainted. 

LITERATURE 

Ely,  R.  T. :    Monopolies  and  Trusts,  pp.  187-190. 
Haney,  L.  H. :   Business  Organization  and  Combination. 
Jenks,  J.  W. :    The  Trust  Problem. 

Report  of  the  United  States  Industrial  Commission,  Vol.  II. 
Smith,  Adam :    Wealth  of  Nations,  Bk.  I,  Ch.  I. 
Van  Hise,  C.  R. :    Concentration  and  Control:    a  Solution  of  ike 
Trust  Problem  in  the  United  States. 


PART  m.  TRANSFERS  OF  GOODS 
(EXCHANGE) 

CHAPTER  I 
INTRODUCTORY 

The  Nature  of  the  Subject.  —  We  have  now  studied  two 
of  the  main  parts  of  economic  analysis  and  theory.  We 
have  learned  something  regarding  the  consumption  of  goods, 
and  also  something  regarding  their  production.  We  have 
now  to  study  the  question  how  and  by  what  means  goods 
are  exchanged  among  men,  and  what  determines  the  quanti- 
tative ratios  in  which  they  exchange.  By  the  conditions  of 
modem  industry  almost  every  man  produces  more  of  some 
one  commodity  or  of  some  few  commodities  than  he  himself 
consumes;  and,  on  the  other  hand,  every  man  consumes 
very  many  goods  which  he  himself  has  not  produced.  In 
other  words,  production  to-day  is  almost  entirely  "  for  the 
market."  This  is  possible  only  because  men  transfer  goods 
from  one  to  another.  Such  transfers  of  goods  constitute  a 
very  great  part  of  our  economic  life.  The  business  of  one 
important  industrial  class,  that  of  merchants,  consists  in 
effecting  such  transfers.  The  operations  in  which  merchants 
are  engaged  we  call  by  the  general  name  commerce.  But 
commerce  requires  a  multitude  of  other  businesses  to  assist 
it,  among  which,  especially  prominent,  are  those  of  providing 
means  of  communication  and  transportation  and  exchange, 

178 


INTRODUCTORY  179 

such  as  public  roads,  railways,  telegraphs,  telephones,  and 
banks.  These  agents  of  commerce,  while  they  do  not  con- 
fine their  functions  entirely  to  the  assistance  of  merchants, 
do  aid  the  entire  community  in  bringing  about  desired  trans- 
fers of  goods. 

Exchange.  —  Transfers  of  goods  are  of  two  kinds :  they 
may  be  either  one-sided  transfers,  as  in  the  case  of  gifts, 
bequests,  inheritance,  taxes,  and  fines;  or  they  may  be 
two-sided  transfers,  as  is  the  case  with  nearly  all  economic 
transfers  with  which  we  have  to  do. 

The  part  of  economics  which  we  are  about  to  study  is  by 
most  economists  called  "  exchange,"  because  the  term  "ex- 
change," referring  to  two-sided  transfers,  covers  so  many 
of  the  transactions  that  are  the  subject  of  our  study.  But 
since  money  and  banks,  which  are  to  be  treated  in  the  pres- 
ent part  of  the  book,  are  agencies  in  effecting  one-sided 
transfers  as  well  as  two-sided  transfers  of  goods,  we  have 
included  the  name  "  transfers "  with  the  simpler  word 
"  exchange  "  to  express  more  completely  the  nature  of  the 
subject. 

Since  exchanges  of  goods  regularly  increase  the  utilitj'' 
of  the  goods  exchanged,  it  is  evident  that  exchange  is  a  part 
of  production  and  might  be  treated  under  that  general 
heading.  But  the  phenomena  of  exchange  are  of  a  character 
so  distinct  and  so  important  that  it  is  considered  better  to 
treat  them  in  a  part  by  themselves. 

Advantages  of  Exchange.  —  It  is  not  uncommon  even 
to-day  to  hear  men  talk  as  if  an  exchange  of  goods  could 
benefit  only  one  of  the  two  exchangers.  Sometimes,  indeed, 
men  speak  as  if  what  is  gained  by  one  party  to  an  exchange, 
whether  an  individual  or  a  nation,  must  be  at  the  loss  of  the 
other.  We  do  not  stop  to  think  that  when  we  purchase  a 
hat  or  a  suit  of  clothes,  we  regularly  profit  by  the  trans- 


180     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

action ;  but  it  is  evident  that  if  we  did  not  think  the  thing 
purchased  more  useful  to  us  than  the  money  paid  for  it, 
we  would  not  make  the  exchange.  Let  us  study  for  a  moment 
the  reasons  why  men  find  it  profitable  to  exchange.  In  the 
first  place,  (1)  the  tastes  and  customs  which  in  part  determine 
utility  vary  (a)  from  nation  to  nation,  and  (6)  from  man  to 
man.  It  is  evident,  then,  that  when  a  commodity  passes 
from  an  individual  or  a  nation  with  little  taste  for  it  to  one 
with  a  strong  liking  for  it,  the  exchange  increases  the  utility 
of  the  commodity.  In  the  second  place,  (2)  different  coun- 
tries or  different  regions  of  the  earth  differ  from  one  another 
in  their  (a)  natural  or  (6)  acquired  advantages  in  the  production 
of  different  commodities.  Goods  that  one  country  or  one 
section  can  easily  produce  in  abundance  either  because  of 
superior  natural  advantages  or  because  of  the  skill  of  its 
workers,  derived  from  long  experience,  another  country  or 
section  may  be  able  to  produce  only  with  great  diflBculty. 
Thus,  the  planter  of  the  South  and  the  farmer  of  the  North- 
west can  both  profit  by  the  exchange  of  the  cotton  of  the 
one  for  the  wheat  of  the  other.  In  the  third  place,  (3) 
individuals  also  differ  from  one  another,  either  (a)  by  nature 
or  (b)  by  training,  in  their  fitness  for  different  kinds  of  work. 
Thus,  one  man  is  especially  fitted  by  nature  or  by  training 
for  carpentry,  another  for  milling.  In  all  such  cases  each 
individual  will  find  his  greatest  advantage  in  doing  that  which 
he  can  best  do,  exchanging  the  surplus  of  his  product  for 
other  goods  which  he  desires  but  which  others  can  produce  at 
greater  relative  advantage  or  at  less  relative  disadvantage. 
The  Machinery  of  Transfers.  —  In  every  modern  nation 
there  now  exist  on  a  large  scale  institutions  and  appliances 
for  the  furtherance  of  transfers.  These  may  be  briefly 
enumerated  as  follows:  (1)  means  of  transportation  and 
communication ;   (2)  systems  of  weights  and  measures ;   (3) 


INTRODUCTORY  181 

money  and  credit,  banks  of  various  sorts,  clearing  houses, 
and  the  like ;  (4)  stock  and  produce  exchanges ;  (5)  commer- 
cial laws  and  commercial  administration,  including  the 
assistance  of  consuls  who  act  in  part  as  commercial  agents 
of  their  governments  in  foreign  countries ;  (6)  middlemen  of 
all  sorts,  including  retail  and  wholesale  dealers.  Inasmuch 
as  exchange  is  a  part  of  production,  these  instruments  and 
agencies  of  exchange  are  also  instruments  and  agencies  of 
production.  It  is  through  them  that  goods  receive  the 
time,  place,  and  possession  utilities  that  fit  them  for  final 
consumption. 

SUMMARY 

1.  Transfers  of  goods  are  of  two  kinds :   one-sided  and  two-sided. 

The  latter  are  known  as  exchange,  under  which  heading 
this  general  subject  is  often  treated.  Exchange  develops  the 
phenomena  of  value  and  price. 

2.  All  exchange  is  regularly  profitable  to  the  two  parties  to  the 

transfers,  for  the  reasons  that  men  and  places  differ  in  their 
natural  and  acquired  aptitudes  for  different  kinds  of  produc- 
tion, and  that  individuals  and  nations  also  differ  in  their 
tastes  and  customs  in  consumption. 

3.  Modem  industry  has  developed  an  elaborate  mechanism  for 

its  exchanges,  including  means  of  communication  and  trans- 
portation; systems  of  weights  and  measures;  money  and 
credit  and  banks ;  stock  and  produce  exchanges ;  commercial 
laws  and  administration ;   middlemen  of  all  sorts. 

QUESTIONS  FOR  RECITATION 

1.  Give  examples  of  one-sided  transfers ;   of  two-sided  transfers. 

2.  State  the  advantages  of  exchange. 

3.  Mention  some  of  the  means  of  transportation ;   of  communica- 

tion. 

4.  What  is  the  relation  of  exchange  to  production? 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.   How  would  the  adoption  of  international  systems  of  weights 
and  measures  aid  exchanges? 


182     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

2.  Does  a  fall  in  postage  rates  affect  territorial  division  of  labor? 

3.  Do  children  in  a  "shoe  town"  have  a  better  chance  than  others 

to  acquire  skill  in  the  shoe  industry? 

4.  What  are  some  of  the  sources  of  advantage  in  exchanges  between 

the  United   State?  and  Cuba?    Between  a  lawyer  and  a 
doctor? 

UTERATURB 

Any  standard  treatise.     See  particularly: 

Nicholson,  J.  S. :    Principles  of  Political  Economy^  Vol.  II,  Ch.  I, 
pp.  3-10. 


CHAPTER  II. 
VALUE 

Meaning  of  the  Term.  —  One  of  the  most  unportant  and 
difficult  problems  in  economics,  and  the  central  problem 
in  transfers  or  exchange,  as  well  as  in  distribution,  is  that 
of  the  determination  of  value.  Why  do  goods  exchange 
for  one  another  in  the  proportions  that  they  do  ?  Why  do 
the  proportions  in  which  they  exchange  vary  from  time  to 
time  ?    This  is  the  problem  we  now  have  to  study. 

The  Idea  of  Subjective  Value.  —  First  of  all  we  must 
note  that  there  are  two  closely  related  but  distinct  ideas 
of  value,  which  have  been  called  by  the  names  "  subjective 
value  "  and  "  objective  value."  Let  us  try  to  get  an  under- 
standing of  these  ideas  and  of  the  relation  between  them. 
Our  study  of  the  law  of  diminishing  utility  has  shown  us 
that  as  our  stock  of  any  commodity  increases,  the  marginal 
utility  falls ;  that  is,  we  care  less  for  an  additional  portion 
of  it.  We  satisfy  our  most  intense  wants  first,  and,  as  our 
stock  increases,  our  unsatisfied  wants  grow  less  and  less 
urgent.  If,  for  example,  we  had  but  a  very  small  amount 
of  water,  we  should  use  it  for  drinking  purposes  only:  a 
first  increase  might  be  used  for  bathing ;  a  second,  for  wash- 
ing dishes  and  clothes,  and  so  on.  The  greater  the  stock, 
the  less  would  be  the  importance  for  our  welfare  attaching 
to  any  unit  of  that  stock;  the  less  sacrifice  would  we  under- 
go to  get  an  additional  gallon ;  and  the  less  should  we  trouble 

183 


184     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

ourselves  about  the  loss  of  a  gallon.  It  is  the  marginal  utility 
that  determines  the  economic  importance  of  any  commodity 
in  our  estimation.  These  phrases,  capacity  to  excite  desire, 
marginal  utility,  economic  importance,  are  commonly  used 
as  synonymous  with  the  term  "  subjective  value." 

Subjective  Use  Value.  —  But  if  we  inquire  carefully  into 
our  own  thinking,  we  shall  find  that  there  are  two  processes 
of  subjective  valuation.  The  very  core  and  kernel  of  our 
thought  on  the  subject  probably  lies  in  the  idea  that  we  form 
in  our  minds  as  to  the  importance  for  our  welfare  of  a  unit 
of  any  commodity,  whether  we  have  it  in  our  possession  or 
are  merely  thinking  of  our  possible  possession  of  it.  Thus 
when  we  search  our  minds  we  find  at  least  a  rough  estimate 
of  the  importance  to  us  of  each  article  of  our  clothing;  of 
a  ton  of  coal  in  the  cellar ;  of  an  automobile  or  an  aeroplane, 
though  we  may  not  own  one ;  and  so  on  throughout  the  range 
of  things  that  have  or  might  have  a  bearing  on  our  economic 
life.  This  root  or  germinal  idea  of  value,  which  is  really 
the  same  as  the  idea  of  marginal  utility,  is  to  be  distinguished 
from  the  others  by  the  name  subjective  u^e  value,  which  may 
be  defined  as  the  economic  importance  of  a  unit  of  any  commod- 
ity to  the  one  valuing  it. 

These  estimates,  these  subjective  use  valuations,  are 
essentially  incommunicable.  That  is,  we  cannot  convey 
them  to  the  mind  of  another  human  being.  To  illustrate 
first  from  another  field,  we  cannot  tell  another  what  "  black  " 
is  to  us.  The  physicist  may  establish  the  physical  fact  that 
black  means  the  absence  of  light  and  hence  of  color;  but 
you  cannot  by  repeating  the  physicist's  explanation  com- 
municate to  the  mind  of  a  friend  what  idea  or  feeling  the 
word  "  black  "  calls  up  in  your  mind.  How  would  you  try 
to  impart  the  idea  of  black  or  blue  or  white  to  a  man  bHnd 
from  birth  ?    "  But,"  you  will  perhaps  say,  "  though  I  cannot 


VALUE  186 

tell  such  a  blind  man  what  I  mean  by  white,  I  can  tell  it  to 
one  who  sees/'  Hold  a  moment.  It  must  of  course  be 
admitted  that  when  you  tell  a  friend  from  the  tropics  that 
snow  is  white,  the  word  white  represents  for  you,  at  least  in  a 
general  way,  the  same  impression  as  that  made  by  milk, 
clear-weather  clouds,  and  the  like,  and  that  the  word  will 
also  call  up  for  your  friend  similar  examples  of  whiteness. 
But  have  you  any  knowledge,  can  you  know,  that  the  color 
impression  made  by  milk  and  clear-weather  clouds  —  white- 
ness —  is  the  same  for  you  as  for  your  friend  ?  The  fact 
is  that  in  such  a  case  you  can  communicate  to  another  noth- 
ing but  a  comparison,  implied  without  need  of  expression. 
And  the  same  is  true  of  our  estimates  of  subjective  use  value. 
We  cannot  communicate  them.  When  we  try  to  do  so,  we 
find  ourselves  driven  back  upon  comparisons.  Thus,  if 
you  try  to  tell  your  friend  how  much  you  want  a  book,  or  a 
pair  of  hockey  skates,  you  will  find  yourself  falling  back 
upon  such  a  statement  as  this :  "  I  would  be  willing  to  go 
without  this  or  that  for  a  whole  year  if  I  could  have  the 
skates,"  or  "  I  would  be  willing  to  work  for  a  month  to  get 
them."  But  you  have  not  told  your  friend  by  this  how 
great  is  the  absolute  importance  to  you  of  a  month's  time 
with  the  opportunity  to  do  something  else  or  to  do  nothing. 
Subjective  Exchange  Value.  —  And  this  brings  us  to  the 
second  stage  in  the  logic  of  valuation.  Not  only  are  we 
constantly  valuing  individual  units  of  commodities  by  them- 
selves, but  we  are  also  as  constantly  making  comparative 
estimates  among  these.  Hence  results  subjective  exchange 
value,  the  quantitative  ratio  between  two  subjective  use  values 
in  the  mind  of  the  one  who  does  the  valuing.  Notice  that 
although  the  word  exchange  is  used  in  this  name,  it  does  not 
refer  to  any  actual,  objective  exchange,  but  only  to  a  mental 
process,  to  what  might  be  called  an  imaginary  exchange. 


186      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

.  Subjective  exchange  values  may  be  communicated  to  the 
mind  of  another.  Thus  when  one  says :  "  The  gray  horse 
is  worth  double  the  black  mare,"  he  may  well  mean  that,  for 
his  own  economy,  the  gray  would  have  twice  the  economic 
importance  of  the  black,  though  he  does  not,  be  it  noticed, 
tell  us,  —  he  cannot  tell  us,  —  except  in  comparative  tenns, 
what  would  be  the  importance  to  him  of  either  the  gray  or 
the  black. 

Objective  Exchange  Value.  —  We  are  now  prepared  for 
the  third  stage  in  the  development  of  the  process  of  valua- 
tion, —  for  the  idea  of  value  that  is  most  frequently  in  mind 
when  men  use  the  word,  i.e.  objective  exchange  value.  Let  us 
suppose  that  two  men  meet  each  other,  both  cut  off  from 
society  indefinitely,  and  both  stocked  with  provision  of  the 
same  goods,  which  for  simplicity  we  may  suppose  reduced 
to  two,  bread  and  coffee.  Let  us  suppose  further  that  for 
one  of  the  two  men,  John  Doe,  the  subjective  use  values  of 
his  coffee  and  bread  are  represented  by  the  numbers  8  and 
1,  for  pound  of  coffee  and  loaf  of  bread  respectively;  and 
that  for  the  other  man,  Richard  Roe,  the  subjective  use  values 
are  respectively  10  and  2.  We  have  already  explained  that 
no  man  can  communicate  to  another  absolutely  his  subjective 
values,  and  we  cannot,  therefore,  —  except  by  the  proverbial 
story  teller's  license  of  omniscience  as  to  the  minds  of  his 
characters,  —  presume  to  know  that  a  loaf  of  bread  has  for 
John  Doe  a  value  1  and  for  Richard  Roe  a  value  2.  But 
they  might  stand  in  that  ratio,  and  here,  for  illustration's 
sake,  we  assume  that  we  know  them  so  to  stand. 

Now,  on  the  basis  of  the  figures  as  given  here,  it  might 
be  concluded  that  John  Doe  and  Richard  Roe  could  not 
swap,  since  Richard  Roe  is  credited  with  higher  subjective 
use  values  of  both  commodities.  In  other  words,  we  assume 
that  Roe  wants  both  another  loaf  of  bread  and  another 


VALUE  187 

pound  of  coffee  more  than  Doe  does.  But  further  considera- 
tion will  show  such  a  conclusion  to  be  in  error.  If  Doe  wants 
another  pound  of  coffee  eight  times  as  keenly  as  he  wants 
another  loaf  of  bread,  while  Roe  wants  another  pound  only 
five  times  as  keenly  as  he  wants  another  loaf,  Doe  is  relatively 
overvaluing  coffee  and  Roe  is  relatively  overvaluing  bread. 
Both  will  therefore  gain  from  an  exchange.  Doe  will  give 
up  part  of  his  bread  for  part  of  Roe's  coffee.  As  each  finds 
his  stock  of  one  commodity  increasing  and  his  stock  of  the 
other  correspondingly  decreasing,  the  subjective  use  values 
and  the  subjective  exchange  values  of  each  man  will  change 
to  correspond  to  the  changing  stage  of  his  provision.  John 
Doe's  ratio  stood  before  at  8:1.  As  exchange  continues, 
the  first  term  of  his  ratio  will  fall,  the  second  rise.  Richard 
Roe's  ratio  stood  at  10:2.  As  he  parts  with  coffee  for 
bread,  the  first  term  of  his  ratio  will  rise  and  the  other  fall. 

How  long  will  the  exchange  continue?  The  answer  to 
this  question  is  already  implied  in  what  has  been  said  above, 
—  exchange  must,  economically,  continue  until  the  ratios 
become  the  same  for  the  two  men,  somewhere  between  8 : 1 
and  5 : 1  {i.e.  10 :  2).  It  cannot  be  asserted  with  certainty, 
or  even  probability,  that  the  resulting  ratio  of  equilibrium 
will  be  the  half-way  point,  or  6^  :  1,  since  it  is  very  improbable 
that  the  increase  and  decrease  of  stock  will  have  the  same 
significance  for  the  two  men.  All  that  we  can  assert  with 
certainty  is  that  exchange  will  stop  when  the  subjective  ex- 
change values  of  bread  and  coffee  —  not  the  subjective  use 
values  —  have  become  the  same  for  the  two  men. 

In  the  two  earlier  ideas  of  value,  we  were  dealing  only 
with  mental  processes,  with  things  going  on  in  the  minds  of 
men.  Now  we  have  reached  an  idea  of  value  that  is  rep- 
resented by  actual  physical  phenomena.  Bread  and  coffee 
are  being  exchanged.    We  can  count  the  loaves  and  weigh  the 


188     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

coffee.  What  we  have  written  about  the  states  of  mind  of 
Roe  and  Doe  was  to  explain  why  and  how  the  exchange  took 
place,  to  show  the  relation  of  subjective  value  to  objective 
exchange  value.  But  we  need  not  have  been  mind  readers 
to  understand  the  second  of  these  two.  If  we  had  heard 
them  say  no  word,  we  should  still  know  the  objective  ex- 
change value,  if  we  could  count  the  loaves  that  Doe  passed 
over  to  Roe  and  the  pounds  that  Roe  passed  to  Doe.  If,  for 
instance,  we  find  that  40  loaves  of  bread  and  6  pounds  of 
coffee  change  possession,  we  know  that  in  that  market,  at 
that  time,  the  objective  exchange  valiie  of  bread  per  loaf  is 
1 :  6f  in  terms  of  pounds  of  coffee,  and  conversely  that  the 
objective  exchange  value  of  coffee  per  pound  in  terms  of 
loaves  of  bread  is,  6f :  1,  i.e.  6t.  Objective  exchange  value  is 
the  quantitative  ratio  in  which  goods  or  services  actually  ex- 
change. 

Whenever  two  or  more  minds,  entertaining  different  subjective 
exchange  values,  meet,  the  meeting  of  their  minds  constitutes  a 
market;  in  that  market  differences  in  subjective  exchange  values 
disappear  by  exchange,  and  the  ratio  of  the  exchange  is  the 
then  objective  exchange  valu£  in  that  market. 

Value  and  Price.  —  In  our  illustration  we  have  chosen  a 
case  of  barter,  because  here  as  in  most  cases  it  is  easier  for 
the  mind  to  grasp  the  real  character  of  the  transaction  when 
freed  from  the  more  complex  idea  of  money.  A  sale  of 
goods  for  money  may,  it  is  true,  be  regarded  as  a  direct  act 
of  barter,  money  being  thought  of  for  the  moment  as  like 
any  other  commodity.  But  in  a  more  fundamental  view, 
money  merely  mediates  a  barter  in  which  one-half  the  trans- 
tiction  is  postponed.  That  is,  in  selling  goods  for  money  it 
is  as  though  we  had  taken  butter  or  eggs  to  a  country  store, 
possibly  reserving  to  a  later  time  decision  as  to  what  goods 
we  should  receive  in  exchange.    Every  act  of  exchange, 


VALUE  189 

whether  for  money  or  for  other  goods,  registers  a  value ;  but 
when  we  name  values  in  terms  of  money  value,  we  use  the 
specific  name  price.  Price,  then,  is  simply  value  expressed 
in  terms  of  money.  Value  is  the  genus,  of  which  price  is 
the  best  known  species. 

What  is  a  Market?  —  For  the  sake  of  simplicity,  we  have 
illustrated  the  origin,  cause,  and  nature  of  exchange  by  an 
assumed  economic  meeting  of  two  men.  The  form  of  our 
illustration  has  a  further  value,  then,  if  it  leaves  sharp  in 
the  mind  the  impression  that  not  more  than  two  minds 
meeting  are  necessary  to  the  idea  of  a  market,  —  a  fact 
which  we  are  likely  to  forget  or  fail  to  understand  because 
most  markets  represent  the  meeting  of  many  minds.  In  the 
bigger,  more  active  markets,  values  are  held  fairly  steady 
because  so  many  minds  there  meet. 

Our  physical  presence  is  not  needed  to  constitute  a  market. 
Through  the  post  office,  the  telegraph  and  telephone,  and 
the  "  wireless,"  men's  minds  inay  be  projected  into  many 
scattered  markets  for  many  commodities,  without  need  that 
their  bodies  should  follow.  Thus,  for  example,  the  market 
for  securities  is  much  broader  than  the  mere  rooms  in  which 
the  brokers  of  London,  New  York,  and  many  other  cities 
meet  for  their  transactions.  It  is  made  up  of  millions  of 
clients  or  possible  clients  scattered  throughout  the  world. 
If  at  any  moment  the  price  of  any  security  represents  a  dif- 
ferent ratio  to  other  goods  from  that  which  is  in  the  mind 
of  a  certain  observant  citizen  in  Redlands,  California,  he 
can,  by  telegraph,  buy  or  sell  that  security  until,  by  in- 
creasing or  decreasing  his  stock  of  that  security,  and  corre- 
spondingly decreasing  or  increasing  his  command  over  stocks 
of  other  goods,  he  brings  his  subjective  exchange  valuation 
to  an  equality  with  that  of  the  world  as  expressed  in  the 
market. 


190     ELEMENTARY   PRINCIPLES   OF  ECONOMICS     . 

Of  course  few  markets  are  so  open  and  wide  as  the  one  just 
cited.  Gold  beyond  question  may  be  said  to  have  a  world 
market.  While  wheat  has  a  more  limited  market,  its 
market  is  so  widely  international  that,  to  the  European  and 
American,  at  least,  it  seems  like  a  world  market.  Of  many 
things  it  could  not  be  said  with  practical  truth  that  they 
have  a  world,  or  even  a  nation-wide,  market.  The  extent 
of  any  particular  market  must  be  discovered  from  a  study 
of  its  particular  condition,  always  remembering  what  it  is 
essentially  that  constitutes  a  market. 

Market  and  Normal  Value  and  Price.  —  Let  us  recur  once 
again  to  our  illustration.  We  now  call  attention  to  the 
fact  that,  to  use  the  language  of  certain  advertisements, 
"  no  questions  were  asked  "  as  to  the  origin  of  Roe's  or 
Doe's  stock  of  bread  or  coffee.  We  take  special  care  to 
emphasize  this  because  an  important  economic  distinction 
is  based  upon  it.  When  we  are  inquiring  what  value  or  price 
will  be  registered  in  any  market  at  any  time,  assuming  only 
that  we  know  what  different  quantities  will  he  offered  and 
demanded  at  various  prices,  without  inquiring  why  su^h  offer- 
ings will  be  made  at  those  particular  prices,  we  are  concerned 
with  the  problem  of  market  value  or  market  price,  which,  as  we 
have  explained  in  other  language,  is  always  determined  at 
the  point  at  which  demand  and  supply  are  in  equilibrium,  — 
in  other  words,  at  the  point  at  which  the  greatest  number  oj 
exchanges  can  he  effected  in  the  existing  state  of  supply  and 
demand. 

When,  on  the  other  hand,  we  begin  to  inquire  where  the 
stock  came  from,  with  what  ease  or  difficulty  it  was  brought 
to  market,  etc.,  it  is  obvious  that  we  ask  the  question  only 
because  the  answer  will  throw  light  on  the  probable  future 
supply  and  the  resulting  future  price.  And  when  we 
seek  to  understand,  not  what  is  the  value  or  price  at  any 


VALUE 

moment  or  for  any  short  period,  —  within  which  tht-  stucK 
is  little  subject  to  increase,  as  for  example  a  crop  season,  — 
but  rather  the  ideal  value  or  price  likely  to  he  realized  or  at 
least  approximated  in  any  period  vdthin  which  knovm  condi- 
tions of  supply  imU  have  opportunity  to  be  reflected,  we  are 
shifting  our  inquiry  from  the  problem  of  market  or  short- 
time  value  or  price  to  that  of  normal  or  long-time  value  or 
price.  Normal,  or  long-time,  value  or  price,  then,  is  that 
ideal  value  or  price  —  nx)t  necessarily  measured  by  a  long- 
time average  of  actual  prices  —  around  which  market  values  or 
prices  fluctuate,  and  to  which  they  tend  constantly  to  approxi- 
mate for  any  period  within  which  any  one  set  of  conditions  of 
supply  may  be  expected  to  exercise  a  dominating  influence. 

Normal  Value  further  considered.  —  It  is  apparent  that 
a  study  of  normal  value  involves  a  study  of  the  conditions 
under  which  various  classes  of  commodities  reach  the  market, 
i.e.  the  conditions  of  supply.  The  first  result  of  an  analytical 
study  of  these  conditions  is  the  discovery  that  goods  can  be 
classified,  from  this  point  of  view,  into  three  groups :  (1) 
absolutely  scarce  goods;  (2)  monopolized  goods;  (3)  competi- 
tively produced  goods.  To  shorten  our  terms,  we  may 
describe  the  differing  nature  of  the  scarcity  of  the  three 
classes  by  the  phrases,  (1)  absolute  scarcity;  (2)  monopoly 
scarcity;  (3)  cost  scarcity.  The  meaning  of  these  terms 
will  appear  more  clearly  in  what  follows. 

The  Value  of  absolutely  Scarce  Goods.  —  It  should  be 
clear  now  that  determination  of  the  normal  value  or  price  of 
absolutely  scarce  goods,  such  as  1804  silver  dollars,  or  metal 
occurring  only  in  some  fallen  meteor,  does  not  differ  signifi- 
cantly from  the  determination  of  their  market  value  or  price. 
Supply  being  fixed,  we  may  say,  with  a  rough  sort  of  practical 
truth,  that  their  value  —  normal  or  market  —  is  fixed  by 
demand.    As  Professor  Marshall  happily  illustrates,  it  is 


jZ    elementary  principles  o. 


OMICS 


as  though,  when  one  blade  of  a  pair  of  shears  is  fastened  and 
im.  lovable,  we  were  to  say  that  the  cutting  is  done  with  the 
moving  blade. 

A  diagram  may  help  the  student  to  fix  the  matter  in  mind. 
Let  Oy  be  the  axis  of  price  or  value,  and  OA^  the  axis  of 
quantity,  and  let  DD'  represent  the  state  of  demand  for 
the  commodity,  since,  as  DD^  illustrates,  the  demand  price, 
as  measured  by  the  vertical  distance  between  OX  and  DD', 
falls  with  every  increase  in  the  imagined  offering,  as  measured 
by  the  distance  from  0  along  OX.  Then  if  the  quantity  of 
the  commodity  assumed  to  be  on  the  market  is  fixed,  the 
stock  may  be  represented  by  the  distance  OS,  in  which  case 
the  value  must  be  represented   by  the  vertical   Une  AS. 


4-> 

'S 

u 

P4 


p . X  ....xa: 

p \iA 

0  Is 


D 


10  20  30  40  50 

Thousands  of  Units 
Absolute  Scarcity 


60 


70 


VALUE  193 

If  we  represent  now  an  increased  demand  for  the  commodity 
by  the  curve  IP,  it  is  clear  that  the  new  price  would  be  rep- 
resented hy  A^S. 

Monopoly  Value  or  Price.  —  In  the  case  of  monopoly, 
supply  rests  on  the  will  of  the  monopolist,  as  determined  by 
economic  considerations.  Since  monopolies  and  monopoly 
value  form  the  subject  matter  of  the  next  chapter,  we 
omit  any  further  treatment  of  the  topic  here,  except  in 
connection  with  the  explanation  of  competitive  cost  value, 
which  is  to  follow. 

Normal  Value  of  competitively  Produced  Goods.  —  We 
need  not  here  inquire  to  what  extent  competition  is  actual 
in  the  production  and  sale  of  goods  in  the  modern  industrial 
world.  Even  though  it  should  be  admitted  that  every 
branch  of  industry  shows  traces,  large  or  small,  of  monopoly 
or  of  absolute  scarcity,  it  is  sufficient  for  our  purpose  to 
insist  that,  in  a  great  part^  of  present-day  industry,  some 
measure 'of  competition  is  present  to  influence  price  policy. 
In  considering  the  question  of  the  determination  of  normal 
value  or  price  under  competition,  we  are  really  asking  the 
question :  How  would  price  and  value  be  established  if  com- 
petition were  perfect?  The  answer  to  this  question  we  can 
use  in  deciding  for  ourselves  how  the  price  or  value  is  actually 
established  in  any  given  industry,  according  to  the  relative 
influence  of  absolute  scarcity,  monopoly,  and  competition 
upon  that  industry. 

Now,  when  we  take  up  the  study  of  normal  value  or  price, 
we  find  that  here,  as  in  all  other  cases  of  value,  it  is  the  de- 
mand of  society  that  first  of  all  determines  the  value  or  price. 
The  laws  of  demand  have  been  given  elsewhere  and  ex- 
plained. Let  us  illustrate  this  by  numerical  examples  and 
by  diagram.  We  may  assume  that  in  any  given  period 
society's  demand  for  a  certain  commodity  is  as  follows: 


194     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

For  1,000,000  units,  society  will  pay  per  unit  l24ft|BSt> 
"    2,000,000     "  "        "      "      *♦       "    $lA'^      , 

"    3,000,000      "  "        "      "      "      "    $0.T?ly 

"    4,000,000      "  "         "      "      "      "    $0.50 

and  so,  consistently,  for  other  prices  and  quantities  beyond 
and  within  these  limits.  It  is,  of  course,  obviously  impracti- 
cable to  take  space  for  a  table  that  would  give  a  complete 
picture  of  demand.  The  accompanying  diagram  is  here  used 
to  represent  graphically  the  same  assumed  state  of  demand. 

As  in  our  other  figures,  quantity  is  here  measured  along 
the  OX  axis,  i.e.  by  distance  from  OY  toward  the  right. 
The  marginal  intensity  of  desire,  or  rather  the  marginal 
intensity  backed  by  purchasing  power  and  measured  in 
purchasing  poWer,  is  represented  by  vertical  distance  above 
the  OX  axis,  as  registered  along  the  OY  axis.  These  two 
elements,  quantity  and  marginal  utility,  are  interdepend- 
ent variables.  The  greater  the  quantity,  represented  by 
horizontal  distance  toward  the  right  from  OY,  the  less  the 
marginal  utility,  represented  by  vertical  distance  upward 
from  OX.  Hence  the  character  of  the  line  DD'  which  rep- 
resents the  state  of  demand  here  assumed.  It  will  be 
clear  to  the  student  on  consideration  that  DD',  as  a  demand 
curve,  might  have  been  drawn  more  nearly  horizontal,  and 
indeed  that  it  might  have  been  given  any  slant  or  combina- 
tion of  slants,  representing  other  possible  states  of  'demand, 
provided  only  that  it  be  drawn  to  represent  a  continually 
diminishing  marginal  utility  for  every  increase  in  quantity. 

With  the  table  and  the  graph  in  mind,  we  are  prepared 
to  note  that,  in  a  very  real  fundamental  sense,  the  purchasers 
always  fix  the  price  or  value.  In  other  words,  it  rests  with 
society  to  say,  for  any  quantity  offered,  what  it  will  pay  for 
a  unit  of  that  quantity. 

But  price,  though  it  is  in  every  case  detennbed  by  society, 


VALUE 


195 


depends,  as  just  said,  upon  the  quantity  offered,  and  we 
must  therefore  now  consider  how  the  quantity  offered  in 
the  market  is  determined,  on  the  assumption  of  perfect 
competition. 


Y 

$2J0O 

1.-7K 

^ 

I 

\ 

1,60 

\ 

^ 

"^\ 

•1 
|5l25 

\ 

fljl  00 

\ 

• 

gA.W 

,2 

.75 
.50 
.25 
.00 

N 

^ 

^ 

lD' 

'-ii. 

0 

X 

0  .1  2  3  4  5 

Millions  of  Units 
Demand  Curve 

In  the  chapter  on  the  Factors  of  Production  we  have 
explained  that  at  any  given  time  there  is  a  point  in  the  invest- 
ment of  labor  and  capital  upon  a  unit,  of  any  natural  agent 
beyond  which  further  investment  yields  less  than  proportionate 
returns.  If,  then,  we  take  the  case  of  any  commodity  com- 
petitively produced,  in  which  a  natiu'al  raw  material  plays 
a  determining  part,  it  is  evident  that  each  producer  and  all 


196     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  competitive  producers  taken  together  will  be  subject  to 
this  law  in  putting  their  commodity  upon  the  market. 

Let  us  illustrate  such  a  situation  again  by  numerical 
example  and  by  a  graph,  and  let  us  assume  that  the  commod- 
ity is  the  same  one  for  which  we  prepared  above  a  schedule 
and  a  graph  of  demand.  Let  us  assume  that  the  thousands  or 
even  millions  of  producers  of  actual  experience  are  here  repre- 
sented by  four  producers,  A,  B,  C,  D,  and  that  the  expenses 
of  production  of  these  producers  are  severally  as  follows : 

A  can  produce  150,000  units  at  a  unit  exi)ense  of  $0.25 

an  additional  100,000     "        "      "  "        "  $0.50 

50,000     "         "      "  *•        "  $0.75 

30,000     '*        "      "  '♦        •*  $1.00 

40,000     "         "      "  "        "  $1.50 

"  "  10,000    **        "      "  "       "  $2.00 

B  can  produce  300,000  units  at  a  unit  expense  of  $0.25 

an  additional  200,000     "         "      "  "        *'  $0.50 

100,000     '•        "      "  "        "  $0.75 

50,000     "         "      "  "        "  $1.00 

60,000     "         •♦      "  "        "  $1.50 

50,000     "         *'      "  "        "  $2.00 

C  can  produce  400,000  units  at  a  unit  expense  of  $0.25 
an  additional  300,000     "         "      "  "        "  $0.50 

200,000     "         •*      "  "        •'  $0.75 

120,000     ••         "      "  '*        "  $1.00 

150,000     "         •*      "  ••        *♦  $1.50 

140,000     "        "      "  "        **  $2.00 

D  can  produce  500,000  units  at  a  unit  expense  of  $0.25 
an  additional  400,000     "        "      "  "        "  $0.50 

300,000     ••        "      "  "        "  $0.75 

200,000     "         '♦      ♦•  "        *•  $1.00 

250,000     "        "      "  •'        •♦  $1.50 

200,000     "         •*      *•  **        "  $2.00 

Combining  these  tables  we  get  a  supply  schedule  for  all 
the  assumed  producers  as  follows :  — 


VALUE 


197 


Varying  Marginal  Expense  for  Different  Supplies 
1,350,000  at  a  marginal  stated  expense  of  $.025 


2,350,000     " 

"        "  $0.50 

3,000,000     " 

*'  $0^ 

^400,000     " 

"        "  $1.00 

3,900,000     " 

"  $1.50 

4,300,000     " 

"  $2.00 

This  table,  or  supply  schedule,  may  be  represented  graphi- 
cally as  follows :  — 


^  $2.00 

m    1.75 
a> 

C 

._§  i:50 

u 

o 

«   1.00 

OQ 

c 
a 


.50 


.25 


.00 


Y 

O  X 


2  3 

Millions  of  Units  Produced 

Supply  Curve 


As  in  the  graph  of  demand,  quantity  is  here  measured 
by  horizontal  distance  to  the  right  from  axis  OY.  Here 
vertical  distance  above  OX  measures  the  marginal  expense 


198     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

of  production,  in  terms  of  the  money  unit.  SS^  therefore 
describes  the  combined  movement  of  the  interdependent 
variables  of  quantity  and  marginal  expense. 

And  now  let  us  superimpose  the  graph  of  supply  upon  the 
graph  of  demand  as  given  above :  — 


$2.00 
.1.75 
1.50 


tDl.25 


.75 


M 


2& 


Y 

N 

p 

i^ 

\ 

\ 

\ 

/ 

1 

\ 

/ 

\ 

J 

/ 

\ 

/ 

_y 

/ 

^ 

^^v< 

£' 

by 

y 

*=-^ 

0 

.^ 

X 

.00. 


.12  3 

Millions  of  Units 

Supply  and  Demand 


The  graph  here  pictures  what  a  comparison  of  the  demand 
and  supply  schedules  shows,  that  at  $J5  a  unit  3,000,000 
imits  can  be  produced,  and  that  at  the  same  price  of  $.75 
a  unit  the  market  will  take  3,000,000  units  of  the  commodity. 


VALUE  199 

At  this  price  each  of  the  four  producers  is  repaid  for  his 
expense  in  producing  even  his  most  expensive  units.  Here 
again  we  have  had  to  simpUfy  our  problem  unduly  by  taking 
the  average  expense  of  a  large  number  of  additional  units,  as 
the  marginal  expense  or  the  expense  of  the  last  unit.  But 
the  simplification  is  not  at  the  expense  of  the  truth  we  are 
here  merely  illustrating. 

Under  the  conditions  we  have  here  assumed,  the  normal 
supply  of  this  commodity  is  3,000,000  units,  because  that 
is  the  quxintity  which  can  he  produced  and  put  upon  the  market 
at  a  marginal  expense  not  greater  than  society  will  pay  for 
such  a  quantity y  and  $.75  is  the  normal  value  and  price, 
because  at  $.75  society  will  take  just  that  quantity  which 
can  be  produced  at  a  marginal  expense  of  $.75. 

In  discussing  market  price,  we  concluded  by  saying  that 
market  price  is  determined  at  the  point  of  equilibrium  of 
demand  and  supply.  In  the  case  of  normal  or  long- 
time price  of  competitively  produced  goods,  we  can  go  a 
step  farther  and  say  that  the  normal  valu>e  or  price  is 
that  value  or  price  which  brings  into  equilibrium  the  di- 
minishing marginal  utility  with  the  marginal  expense  qfl 
production. 

We  have  taken  for  our  illustration  a  product  subject  to 
the  law  of  diminishing  returns.  The  following  graphs  illus- 
trate in  like  manner  the  determination  of  competitive  normal 
price  on* the  assumption:  first,  that  the  marginal  expense 
does  not  change  with  changes  in  the  quantity  produced,  i.e. 
under  conditions  of  constant  expense,  —  and  second,  that  the 
marginal  expense  diminishes  with  increase  in  quantity  of 
total  output,  i.e.  under  conditions  of  decreoMng  expense  or 
increasing  returns.  The  second  graph  also  illustrates  the 
effect  of  increased  demand  upon  price  under  the  same  con- 
dition of  supply. 


s >fe- 1 s- 


o 

Y 


Constant  Expense 


I\ 

\ 
\ 

Sv 

\s^ 

N 

k 

^v 

"^ 

N 

N 

"^ 

^ 

.s' 

^^^ 

^ 

--- 

1 

"^E 

' 

p  P' 

Decreasing  Expense 
200 


VALUE 


201 


With  such  tables  and  graphs  as  we  have  here  given  in  illus- 
tration, the  student  may,  if  he  will,  find  or  illustrate  many 
curious  and  interesting  facts  about  value.  Thus,  to  take  but 
a  single  case,  let  us  draw  a  graph  to  illustrate  the  effect  of 
increased  demand  upon  the  normal  value  of  a  commodity, 
assuming  the  expenses  of  production  to  remain  constant. 

Explanation  of  these  diagrams 
is  purposely  omitted. 

It  is  usual  to  conclude  a  dis- 
cussion of  the  determination  of 
competitive  normal  value  with 
an  explanation  of  certain  actual 
conditions  which  in  one  way  or 
another  qualify  the  theory  as 
here  given  and  explained.  We 
prefer  merely  to  name  some  of 
the  most  important  of  these  influ- 
ences, leaving  it  to  the  student  to  consider  to  what  extent 
and  in  what  way  they  qualify  or  contradict  the  general  con- 
clusions above  derived  and  explained.  Chief  among  such 
"  frictional  elements,"  as  they  have  sometimes  been  called, 
are  custom,  immobility  of  labor  and  capital,  unequal  taxation, 
planless  production,  and  "  by-products. '[ 

In  the  following  chapter  we  shall  take  up  the  problem  of 
monopoly  value  or  price,  after  first  explaining  what  monopoly 
is  and  how  it  differs  from  competition. 


Yd, 

.     \\>.'     ., 

"              N 

_J 

O  P    P' 

Increased  Demand  and  Con- 
stant Expense 


X 


SUMMARY 

1.  The  term  value  in  economics  has  various  but  related  meanings. 

2.  Subjective  use  value  is  the  economic  importance  of  a  unit  of 

any  commodity  to  the  one  valuing  it. 

3.  Subjective  use  values  are  incommunicable. 

4.  Subjective  exchange  value  is  the  quantitative  ratio  between 

two  subjective  use  values  in  the  mind  of  the  one  who  does 
the  valuing. 


202      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

5.  Exchange  results  from  differences  in  subjective  valuations. 

6.  Whenever  two  or  more  minds,  entertaining  different  subjective 

exchange  values,  meet,  the  meeting  of  these  minds  constitutes 
a  market ;  in  that  market  differences  in  subjective  exchange 
values  disappear  by  exchange,  and  the  ratio  of  the  exchange 
is  the  objective  exchange  value  in  that  market. 

7.  The  word  value,  standing  alone,  usually  means  objective  ex- 

change value,  —  the  quantitative  ratio  in  which  any  two 
goods  or  services  are  exchanged. 

8.  Price    is    objective    exchange    value    expressed    in   terms  of 

money. 

9.  Market  value  is  the  actual  value  in  any  market  at  any  moment 

of  time ;  it  is  always  determined  at  the  point  where  demand 
and  supply  are  in  equihbrium. 

10.  Normal  value  is  the  ideal  value  toward  which  market  values 

tend  during  any  perioa  withm  which  known  conditions  of 
supply  can  exercise  a  dominating  influence. 

11.  Goods  may  be  classified  from  the  point  of  view  of  their  supply, 

as  absolutely  scarce  goods,  monopoly  goods,  and  freely  pro- 
duced goods. 

12.  The  normal  value  of  absolutely  scarce  goods  may  be  said  to  be 

determined  by  demand . 

13.  Freely  produced  goods  may  be  increased  in  quantity :    (1)  at 

an  increasing  unit  cost ;  or  (2)  at  a  constant  unit  cost ;  or 
(3)  at  a  decreasing  unit  cost. 

14.  In  every  case  the  normal  value  will  stand  at  the  point  where 

marginal  utiUty  equals  marginal  cost. 

15.  So-called  frictional  elements,  —  which  obscure  or  modify  the 

general  principles  of  value,  —  include  custom,  immobility 
of  labor  and  capital,  unequal  taxation,  planless  production, 
and  "by-products." 

QUESTIONS  FOR  RECITATION 

1.  Define  subjective  use  value;    subjective  exchange  value;    ob- 

jective exchange  value ;   price ;   market. 

2.  Show  the  relation  of  the  three  ideas  of  value  just  defined. 

3.  Distinguish  the  three  conditions  of  supply  of  goods. 

4.  Distinguish  the  three  conditions  under  which  the  supply  of 

"freely  produced"  goods  may  be  increased. 

5.  Draw  a  graph  to  illustrate  (a)  social  demand;    (6)  supply  of  a 

commodity  produced  at  constant  cost. 

6.  At  what  point  is  market  prioo  determined?   normal  price  of 

freely  produced  goods? 


VALUE  203 


QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  What  is  the  derivation  of  the  word  value?     What  are  some  of 

the  meanings  of  the  word  outside  of  economics?  Is  there 
any  common  content  of  all  the  uses? 

2.  Is  friendship  or  love  capable  of  subjective  valuation?  of  objec- 

tive valuation? 

3.  Name  some  absolutely  scarce  goods ;  monopolized  goods ;  freely 

produced  goods. 

4.  Name  some  goods  that  are  produced  under  conditions  of  in- 

creasing cost ;   decreasing  cost. 

5.  Is  a  universal  rise  in  subjective  use  values  conceivable  ?  in  subjec- 

tive exchange  values  ?  in  objective  exchange  values  ?  in  prices  ? 

6.  How  does  an  increase  of  demand  for  cotton  affect  the  price  of 

cottonseed  oil?  How  would  you  expect  to  see  the  price  of 
gasoline  oil  affected  by  a  considerable  reduction  in  the  price 
of  automobiles? 

7.  Is  mutton  or  wool  the  by-product  in  sheep-growing?     Is  the 

case  everywhere  the  same? 

LITERATURE 

Clark,  J.  B. :    The  Distribution  of  Wealth,  Ch.  XIX. 
Jevons,  W.  S. :   Theory  of  Political  Economy,  Chs.  Ill  and  IV. 
Marshall,  A. :  Principles  of  Economics,  Bk.  V,  Ch.  Ill,  5. 
Smart,  W. :  Introduction  to  the  Theory  of  Value,  Chs.  V  and  X. 


CHAPTER  III 
MONOPOLIES  AND   MONOPOLY   VALUE 

In  the  preceding  chapter  we  reached  the  conclusion  that 
in  the  case  of  goods  freely  produced  under  competitive  condi- 
tions, value-is_deteraained  or  fixed  at  the  point  where  the 
mai:giimLcQSi.eauals  the  naarginal  utility  of  the  supply.  At 
the  same  time  it  was  pointed  out  thatliot  all  goods  are  thus 
produced.  The  largest  and  most  important  class  of  such 
exceptional  goods  consists  of  those  produced  by  monopolists. 
In  order  to  complete  our  theory  of  value,  therefore,  we  must 
now  inquire  how  monopoly  value  is  determined ;  and,  that 
we  may  do  this  the  more  understandingly,  let  us  first  see 
what  monopoly  is. 

Definition  and  Classification.  —  It  will  be  well  for  the 
student  to  study  carefully  the  following  definition,  weighing 
deliberately  the  several  words  and  phrases :  Monopoly  means 
that  substantial  unity  of  action,  on  the  part  of  one  or  more 
persons  engaged  in  some  kind  of  business,  which  gives  exclusive 
control,  more  particularly,  although  not  solely,  with  respect  to 
price. 

Writers  on  the  subject  of  monopoly  have  made  many 
classifications,  varying  with  the  point  of  view  from  which  the 
classification  is  approached.  The  following,  which  is  rather 
a  classification  of  the  sources  of  monopoly  power  than  of 
monopolies,  will,  it  is  believed,  prove  especially  helpful  in 
explaining  the  origin  and  real  nature  of  actual  monopolies. 

204 


...  JNOPOLIES   AND   MONOPOLY    VALUE         205 

A.  Social  Monopolies. 

I.   General  Welfare  Monopolies. 

1.  Patents. 

2.  Copyrights. 

3.  Trade-marks. 

4.  Public  consumption  monopolies. 

5.  Fiscal  monopolies. 

II.   Special  privilege  monopolies. 

1.  Those  based  on  public  favoritism. 

2.  Those  based  on  private  favoritism. 

B.  Natural  Monopolies. 

I.  Those   arising   from   limitation   of   supply   of   raw 

material. 
II.   Those  arising  from  peculiar  characteristics  of  the 

business  itself. 
III.   Those  arising  from  secrecy. , 

Social  Monopolies.  —  Businesses  are  social  monopolies 
in  so  far  as  they  are  made  morwpolies  not  by  their  own  char- 
acteristics, but  either  by  legislative  enactment  or  by  forming  so 
close  a  connection  with  great  natural  monopolies  that  they 
partake  of  the  nature  of  the  latter. 

In  old  times  kings  and  queens  frequently  granted  exclusive 
business  privileges  to  favored  persons,  and  permitted  no 
one  except  those  named  to  engage  in  such  undertakings. 
Such  monopolies,  however,  became  so  odious  that  sovereigns 
were  compelled  to  cease  granting  them.  Governments 
still  create  exclusive  privileges  by  patent  and  copyright  laws, 
but  they  do  so  in  behalf  of  the  general  public.  Authors 
and  inventors  are  given  exclusive  rights  over  their  produc- 
tions for  a  limited  period.  These  monopolies  are  believed 
to  have  justified  themselves  through  the  stimulus  which 
they  have  given  to  invention  and  authorship.    Yet  it  must 


2$%     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

not  be  forgotten  that  all  intellectual  achievements  are  in 
part  a  social  product,  —  that  they  are  due  in  great  measure 
to  earlier  achievement.  The  telephone  was  preceded  by  a 
century  of  scientific  invention  and  discovery  along  the  line 
of  sound  transmission,  and  most  of  that  investigation  was 
very  ill  rewarded.  On  the  whole,  experience  seems  to  justify 
the  conclusion  that  patents  and  copyrights  are  beneficial, 
but  that  patents  do  not  rest  on  so  strong  a  basis  as  do  copy- 
rights, since  no  two  persons  could  ever  write  precisely  the 
same  book. 

The  trade-mark  is  a  legal  monopoly  similar  to  the  patent 
and  the  copyright,  and,  in  fact,  is  itself  a  copyright.  It  is 
given  a  separate  place  here  because  of  its  peculiar  importance 
in  modern  business.  In  connection  with  lavish  advertising, 
trade-marks  in  recent  days  have  been  made  the  basis  of 
enormous  profits. 

Public  consumption  monopolies  and  fiscal  monopolies 
call  for  a  word  of  special  comment.  They  can  be  distin- 
guished only  by  knowing  the  object  which  the  government 
has  in  view  in  establishing  them.  //  the  government  manages 
for  itself  or  grants  to  another  a  monopoly  of  the  liquor  traffic 
with  the  object  of  regulating  the  consumption,  the  monopoly 
is  a  public  consumption  monopoly.  If,  on  the  other  hand, 
the  chief  object  is  not  regulation  but  income,  the  monopoly 
is  a  fiscal  one.  Often  the  two  objects  are  so  blended  that 
it  is  diflScult  or  impossible  to  name  the  resulting  monopoly. 

Our  classification  names  two  kinds  of  special  privilege 
monopolies.  Those  monopolies  that  are  due  to  special 
tariff  advantages  or  to  other  legislation  are  rightly  said  to 
be  based  on  public  favoritism.  The  other  class  of  special 
privilege  monopolies  consists  of  those  that  grow  up  through 
special  favors  granted  by  other  monopolies,  especially  nat- 
ural monopolies,  such  as  railways. 


MONOPOLIES  AND   MONOPOLY    VALUE         2i7 

Natural  Monopolies.  —  Natural  monopolies  are  those  that 
depend  for  their  existence  on  circumstances  or  conditions  within 
the  businesses  themselves  rather  than  on  the  will  or  consent  of 
society.  They  grow  up  independently  of  the  social  will  and 
desire  and  sometimes  even  in  direct  opposition  to  it.  The 
words  we  have  used  in  our  classification  will  sufficiently 
explain  the  different  sources  from  which  they  arise.  By  far 
the  most  important  of  all  monopolies  are  those  of  the  second 
class  of  natural  monopolies,  chief  among  which  are  the  follow- 
ing: wagon  roads  and  streets,  canals,  docks,  bridges  and 
ferries,  waterways,  harbors,  lighthouses,  railways,  tele- 
graphs, telephones,  the  post  office,  electric  lighting,  water- 
works, gasworks,  street  railways  of  all  kinds.  The  peculiar 
characteristics  that  always  give  rise  to  monopoly  of  this 
class  are  indicated  in  the  following  statement:  Whenever 
there  is  a  decided  increment  in  gain  resulting  from  combination, 
there  results  a  tendency  to  monopoly  which  overcomes  all 
obstacles.  This  decisive  increment  of  gain  from  combination  is 
always  present  in  buMnesses  (a)  that  occupy  peculiarly  favor- 
able spots  or  lines  of  land,  and  (b)  that  furnish  services  or 
commodities  which  must  be  used  in  connection  with  the  plant 

Of  late  years  many  economists  have  argued  that  monopoly 
may  naturally  arise  without  any  of  the  advantages  here 
indicated,  through  the  superior  power  of  great  capital  and 
the  superior  economy  of  great  concentration.  They  would 
call  such  monopolies  capitalistic.  There  is  not  space  to  give 
all  the  reasons  for  dissenting  from  this  conclusion  regarding 
so-called  capitalistic  monopolies.  One  or  two  very  cogent 
reasons  may,  however,  be  stated.  An  exhaustive  study  of 
the  cases  cited  in  support  of  this  alleged  tendency  to  monop- 
oly has  failed  to  reveal  a  single  one  in  which  the  monopoly 
did  not  enjoy  one  or  many  of  the  monopoly  advantages  that 


208      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

we  have  already  mentioned  and  explained.  Moreover, 
many  eases  in  which  the  possession  of  large  capital  seemed 
on  the  surface  to  be  a  dominating  influence  have  been  cases 
in  which  the  monopoly  was  so  short-lived  as  to  furnish  little 
support  to  the  argument  of  those  who  cited  them.  After 
all,  whatever  may  be  the  advantage  conferred  by  large  capital, 
we  must  remember  that  capital  is  so  plentiful  that  one 
gigantic  plant  can  always  find  a  rival  whenever  a  slight 
margin  of  profit  invites  its  establishment. 

Our  conclusion,  then,  may  be  stated  as  follows :  There  is 
a  great  and  growing  field  of  industry  in  which  competition 
is  not  natural  or  permanently  possible,  for  reasons  explained 
in  the  text;  there  is  another  field  within  which  monopoly 
may  easily  be  engendered  by  unwise  social  action,  and  which 
is  likely  to  become  narrower  as  the  nation  grows  in  intelli- 
gence and  thoughtfulness ;  and  finally  there  is  a  third  field 
within  which  natural  monopoly  does  not  and  cannot  exist, 
and  within  which  social  monopoly  is  unlikely  to  arise. 

The  First  Law  of  Monopoly  Price.  —  And  now,  having  seen 
what  monopoly  is,  we  may  attempt  an  answer  to  the  ques- 
tion. How  is  monopoly  value  or  monopoly  price  determined  ? 

First  of  all,  we  may  say  that  monopoly  value,  like  all 
objective  exchange  values,  is  determined  by  the  relation 
between  demand  and  supply,  and  that  demand  is  here  as 
elsewhere  determined  by  marginal  utility.  The  supply, 
however,  is  not  here  determined  as  under  competition  at  the 
point  of  marginal  cost,  but  at  the  poinC where  the  monopolist 
will  secure  the  maximum  of  net  revenue  possible  in  the  existing 
state  of  demand.  In  other  words,  the  monopolist,  freed  from 
competition  and  governed  only  by  the  consideration  of  demand, 
is  able  to  adjust  supply  to  demand  in  such  a  way  that  the  price 
will  stand  at  the  point  of  highest  net  return.      This  may  be 


I 


MONOPOLIES  AND   MONOPOLY    VALUE         209 

called  the  law  of  monopoly  price  from  the  point  of  view  of  supply. 
In  determining  what  quantity  shall  be  supplied  and  hence 
what  shall  be  the  resulting  price  as  fixed  by  the  demand  of 
the  public,  —  in  other  words,  what  is  the  point  of  highest 
net  returns,  —  the  monopolist  consciously  or  unconsciously 
proceeds  according  to  the  following  principles :  — 

1.  He  realizes  that  every  increase  in  the  offering  of  his 
monopolized  product  will  result  in  lowering  the  marginal 
utility,  and  hence  the  demand  price  of  the  product,  while 
every  decrease  in  the  offering  will  result  in  a  higher  marginal 
utility,  and  hence  a  higher  price. 

2.  Of  the  expenses  of  production  there  are  some  that  vary 
in  their  aggregate  in  almost  regular  proportion  with  the 
variation  in  the  supply.  Thus  if  the  product  is  doubled,  the 
total  cost  of  raw  material  will  be  just  about  doubled.  Such 
expenses  are  called  variable  expenses. 

3.  Other  expenses,  within  certain  limits,  remain  more 
nearly  the  same  in  their  aggregate,  no  matter  what  the  amount 
of  the  product.  These,  called  the  fixed  expenses,  would  in- 
clude the  cost  of  plant,  salary  of  superintendent,  interest 
on  bonds,  etc.  The  student  should  note  that  the  expenses 
here  called  variable  are  variable  only  in  their  aggregate,  the 
expense  per  unit  being  rather  constant  or  invariable  while 
those  expenses  that  are  called  fixed  are  really  variable  for 
the  unit  of  product,  being  constant  or  fixed  only  in  the  aggre- 
gate. Thus,  -while  the  total  expense  represented  by  bond 
interest  is  fijxed  or  invariable,  and  is  classed  under  fixed 
expenses,  the  amount  of  interest  chargeable  to  ^ny  unit  of 
product  decreases  with  every  increase  of  output. 

It  follows  from  the  above  principles  that  the  monopolist, 
since  he  is  seeking  the  maximum  net  revenue  from  his 
business,  will  pay  no  attention  to  fixed  charges  in  establishing 
the  price  of  the  product,  but  will  consider  only  the  variable 


210     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

expenses  in  connection  with  the  probable  demand  for  his 
goods  at  various  prices. 

An  Illustration.  —  We  may  illustrate  by  an  example  the 
operation  of  these  principles.  The  following  table  shows  in 
parallel  columns  the  number  of  sales  of  a  monopolized  good 
at  different  prices :  the  total  resultant  earnings ;  the  variable 
expenses ;  the  fixed  expenses ;  the  total  expenses ;  and  finally 
the  net  revenue  or  monopoly  profit :  — 


Pbicb 

PER 

Unit 

Number 
Sales 

Total 
Earnings 

Variable 
Expenses 
PER  Unit 

Total 
Variable 

Expenses 

Fixed 
Expenses 

Total 
Expenses 

Net 
Revenxtb 

$.10 
.09 
.08 
.07 
.06 
.05 
.04 

600,000 
800,000 
1,200,000 
1,800,000 
2,500,000 
3,500,000 
5,000,000 

$60,000 

72,000 
96,000 
126,000 
150,000 
175,000 
200,000 

$.03 
.03 
.03 
.03 
.03 
.03 
.03 

$18,000 
24,000 
36,000 
54,000 
75,000 
105,000 
150,000 

$50,000 
50,000 
50,000 
50,000 
50,000 
50,000 
50,000 

,$68,00i) 
74,000 
86,000 
104,000 
125,000 
155,000 
200,000 

-$8,000 
-  2,000 
+10,000 
+22,000 
+25,000 
+20,000 
+  0,000 

Study  of  the  table  will  show  why,  in  the  case  assumed 
here,  the  monopoly  price  will  stand  at  six  cents.  Competi- 
tion, if  it  were  present,  would  keep  on  increasing  the  supply 
as  long  as  normal  profit  could  be  obtained.  In  our  illus- 
tration the  lowest  price  at  which  production  could  be  carried 
on  would  be  four  cents ;  and  four  cents  would  therefore  be 
the  competitive  price  or  the  price  determined  by  the  balanc- 
ing of  marginal  utility  against  marginal  cost  of  production, 
assuming  that  the  weakest  competitor  in  the  business  would 
merely  be  repaid  for  all  expenses  incurred.  Other  com- 
petitors, more  efficient,  and  therefore  producing  a  large 
part  of  their  product  at  less  expense,  could  still  derive  a 
profit  at  this  price.  But  since  the  monopolist  has  such  con- 
trol over  the  production  that  he  can  control  the  offering  to 


MONOPOLIES  AND   MONOPOLY   VALUE  211 

the  market,  he  will  cut  off  production  at  2,500,000  units,  at 
which  point  the  marginal  utility,  and  hence  the  demand, 
will  fix  a  price  of  six  cents,  and  will  give  the  largest  net 
return,  $25,000. 

The  student  may  be  interested  in  seeing  the  facts  shown  in 
the  above  table  presented  in  graphic  form.  This  illustrates 
only  one  of  several  possible  cases,  that  in  which  the  monopo- 
list is  producing  a  commodity,  the  making  of  which  falls 
under  the  law  of  decreasing  costs  per  unit  as  the  output  is 
increased.  Such  a  condition  is  most  favorable  to  the  es- 
tablishment of  monopoly.  But  monopoly  can  also  exist  under 
conditions  of  constant  and  increasing  cost  per  unit. 

The  diagram  on  page  212  shows  the  gross  sales,  total 
expenses,  and  net  profits  which  would  result  at  three  differ- 
ent prices  at  which  the  monopolist  might  choose  to  sell  the 
product.  If  the  monopoly  fixes  the  price  at  4|-  cents,  its 
total  sales  would  equal  the  area  of  the  rectangle  JKPO,  while 
its  total  expenses  of  production  would  be  represented  by  the 
rectangle  LMPO.  Similarly,  at  the  selling  price  of  6  cents, 
rectangle  EFRO  would  equal  the  total  sales  and  GHRO 
the  total  expenses ;  while,  at  a  price  of  8  cents,  the  same 
facts  would  be  illustrated  by  rectangles  ABNO  and  CVNO 
respectively.  But  the  monopoly  is  not  so  much  interested 
in  gross  sales  or  gross  expenses  as  in  total  net  profits.  Evi- 
dently, the  profit  per  unit  is  represented  by  the  vertical  dis- 
tance between  the  supply  and  demand  curves.  But  total 
profit  depends  not  only  upon  the  gain  per  unit  but  also  upon 
the  number  of  units  which  may  be  sold.  The  products  of 
these  quantities,  at  8,  6,  and  4rJ  cents  respectively,  are  shown 
by  the  rectangles  ABCV,  EFGH,  and  JKLM.  It  is  to  the 
interest  of  the  monopoly  to  make  this  rectangle  of  profits 
just  as  large  as  possible. 

If  the  monopolist  fixes  the  price  at  4^  cents,  he  can  sell 


212      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 


4,200,000  units  and  the  profits  are  represented  by  rectangle 
JKLM,  If,  however,  he  raises  the  price  to  6  cents,  though 
he  can  dispose  of  only  2,500,000  units,  his  net  gain,  as  shown 


12 
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by  rectangle  EFGH,  is  materially  increased.  Thus  en- 
couraged, the  monopolist  might  try  placing  the  price  still 
higher  at  8  cents,  but,  in  this  case,  he  will  have  overreached 
himself;  for  at  this  price  society  will  take  only  1,200,000 
units,  and  the  net  profit  rectangle  ABCV  is  therefore  much 


MONOPOLIES  AND   MONOPOLY   VALUE         213 

smaller  than  EFGH,  which  represents  the  net  gain  at  a 
price  of  6  cents.  Evidently,  then,  the  monopolist  will,  in 
this  state  of  demand  and  supply,  attempt  to  keep  the  price 
in  the  neighborhood  of  6  cents  per  unit. 

The  student  will  find  it  an  interesting  and  valuable  exercise 
to  draw  similar  graphs  of  monopoly  price  determination  for 
commodities  produced  (a)  under  conditions  of  constant 
expense  and  (b)  under  conditions  of  increasing  expense. 

The  Effect  of  a  Tax.  —  Our  numerical  illustration  and  our 
diagram  may  both  be  made  to  convey  a  lesson  regarding  the 
influence  of  taxation  upon  monopolies  and  monopoly  price. 
Fixed  expenses  have  no  influence  in  determining  the  price. 
If,  therefore,  a  fixed  tax,  say  of  $5000  a  year,  were  to  be  laid 
upon  this  monopoly,  it  would  not  result  in  an  increase  of 
price.  A  study  of  the  table  will  show  that,  with  such  a  tax, 
the  net  revenue  at  price  .08  would  be  $5000 ;  at  price  .07, 
$17,000;  at  price  .06,  $20,000;  at  price  .05,  $15,000;  at 
price  .04,  —$5000.  The  reason  for  this  is  that  a  fixed 
tax  would  become  for  the  monopoly  a  part  of  its  fixed  ex- 
penses. Thus  the  price  .06  will  still  be  the  point  of  maximum 
net  revenue  and  hence  the  monopoly  price.  On  the  other 
hand,  a  variable  tax,  for  instance  a  tax  of  one  cent  per  unit, 
would  result  in  this  case  in  raising  the  monopoly  price.  In 
our  illustration,  such  a  tax  would  make  the  net  revenue 
at  the  price  .08,  -  $2000 ;  at  the  price  .07,  $4000 ;  at  the 
price  .06,  nothing ;  at  the  price  .05,  —  $15,000.  Thus,  though 
the  monopoly  would  find  its  profits  greatly  curtailed  by 
such  a  tax,  consumers  would  be  compelled  to  pay  one  cent 
more  per  unit  for  the  monopoly  product.  The  possible 
advantage  which  society  might  draw  from  the  tax  would 
therefore  be  wholly  or  in  part  offset  by  the  increased  price 
which  the  public  would  have  to  pay  for  the  commodity. 
Such  a  raising  of  the  price  will  not  take  place,  however,  if 


214     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

the  demand  at  the  higher  price  is  not  sufficient  to  make  as 
great  a  net  revenue  as  at  the  lower  price.  We  may  conclude, 
therefore,  that  fixed  taxeSy  or  taxes  on  the  net  revenioe  of  a 
monopoly,  cannot  be  shifted  wholly  or  in  part  by  a  change  in 
price ;  lohile  taxes  laid  in  proportion  to  the  amount  of  business, 
since  they  contribute  an  addition  to  the  variable  expenses,  may 
be  wholly  or  in  part  shifted  by  a  change  in  price. 

If  the  diagram  be  again  used  for  illustration,  it  may  easily 
be  seen  that  any  fixed  tax  must  be  subtracted  from  the 
rectangle  representing  net  profits.  It  is  evidently  to  the 
advantage  of  the  monopolist  to  deduct  such  a  tax  from  the 
largest  rather  than  from  one  of  the  smaller  rectangles.  On 
the  other  hand,  a  tax  of  one  cent  per  unit  of  output  would 
raise  the  line  representing  the  expense  of  production  per 
unit  by  a  like  amount  throughout  its  whole  length.  This 
would  entirely  change  the  shape  and  area  of  the  various 
profit  rectangles  and  in  the  case  here  considered  would  make 
the  maximum  net  profit  rectangle  appear  at  the  price  .07. 

The  Second  Law  of  Monopoly  Price.  —  It  is  sometimes 
said  that  the  price  of  a  monopolized  good  depends  solely 
upon  the  will  of  the  monopolist.  In  the  strict  sense  of  the 
phrase  this  is  not  true.  As  our  explanation  has  shown,  the 
monopolist  is  forced  by  economic  motives  to  establish  such  a 
price  as  will  give  the  maximum  net  revenue.  There  are 
certain  conditions  on  the  side  of^demanH  which  therefore 
have  a  decisive  influence  in  determining  monopoly  price.  We 
may  group  the  most  important  of  these  in  a  general  state- 
ment which  may  properly  be  called  a  law  of  monopoly  price 
from  the  point  of  view  of  demand.  The  greater  the  intensity 
of  customary  use  of  the  monopolized  commodity  or  service,  the 
higher  the  general  average  of  economic  well-being,  and  the  more 
readily  wealth  is  generally  expended,  the  higher  will  be  the 
monopoly  price  which  will  yield  the  largest  net  returns.    Thus 


MONOPOLIES  AND   MONOPOLY    VALUE  215 


monopoly,  without  any  effort  of  its  own,  shares  in  the  in- 
creasing wealth  of  a  country,  and  absorbs  a  considerable  part 
of  it.  It  is,  for  example,  among  other  influences,  the  larger 
wealth  and  the  greater  willingness  to  spend  freely  that  make 
monopoly  more  profitable  in  the  United  States  than  in 
Germany  or  other  European  countries.  The  search  for 
other  illustrations  of  the  law  should  prove  an  interesting 
and  valuable  exercise  fo^  the  student. 

In  our  discussion  of  monopoly  price  up  to  this  point  cer- 
tain assumptions  have  been  tacitly  made,  which  it  is  well 
now  to  state  and  briefly  discuss.  We  have  been  assuming 
that  the  monopolist,  in  forming  his  price  policy,  is  actuated 
solely  by  desire  to  get  the  greatest  money  return ;  that  he 
is  willing  to  disregard  unfavorable  public  opinion  except  in 
so  far  as  such  public  opinion  would  influence  demand  for  his 
commodity ;  that  he  knows  definitely  the  expense,  per  unit 
and  aggregate,  for  his  different  possible  offerings  to  the 
market,  and  with  equal  definiteness  what  the  public  will 
pay  per  unit  for  different  possible  offerings.  It  is  of  course 
in  the  highest  degree  improbable  that  any  one  of  these 
assumptions  is  completely  true  for  any  monopolist.  Regard 
for  the  good  opinion  of  his  fellows  may  possibly  lead  a  monop- 
olist to  get  less  money  from  them  than  his  monopoly  power 
makes  possible.  On  the  other  hand,  he  may  brave  public 
opinion  in  making  his  money  in  the  expectation  that  he  can 
win  back  the  approval  of  the  public  by  a  lavish  and  spectac- 
ular philanthropic  expenditure  of  his  monopoly  gains. 
Public  opinion  may  find  expression  in  legislation  that  will 
limit  his  monopoly  power.  Again,  such  knowledge  of  the 
state  of  demand  as  has  been  assumed  is  perhaps  never  pres- 
ent in  real  life,  though  some  monopolists  seem  to  have  an 
almost  uncanny  knowledge  of  this  factor.  In  so  far  as  our 
assumptions  are  unreal  in  the  case  of  any  monopolist,  to 


216      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

that  extent  will  the  actual  monopoly  price  be  below  or  above 
:  the  one  indicated  by  our  analysis.  How  far  the  assumptions 
are  unreal  must  be  discovered  in  each  case  from  careful  study 
of  the  particular  circumstances  of  that  case. 

Natural  Monopolies  of  Class  Two.  —  It  was  long  ago  said 
by  a  shrewd  English  engineer  that  where  combination  is 
possible,  competition  is  impossible.  Now  combination  is 
always  possible  in  the  case  of  natural  monopolies  of  the 
second  class.  Indeed,  combination  in  such  businesses  is 
inevitable.  If  two  gas  companies  in  a  city,  each  with  a 
capital  of  a  million  dollars,  are  able  without  combining  to 
make  10  per  cent  profits,  they  will,  when  combined,  make 
much  more  than  10  per  cent.  The  force  drawing  them  to- 
gether works  as  constantly,  if  not  as  uniformly,  as  the  attrac- 
tion of  gravitation. 

The  testimony  of  experience  on  this  point  is  ample.  There 
is  never  any  sustained  competition  in  this  field.  There  is 
sometimes  "  war  "  to  settle  the  terms  of  combination,  and 
popular  language,  when  it  uses  the  word  "  war  "  in  this 
connection,  as  in  speaking  of  gas  wars,  etc.,  is  scientifically 
correct.  And  yet,  even  to-day,  after  nearly  a  century  of 
conclusive  experiment,  it  frequently  happens  that  a  city 
is  led  by  lavish  advertising  to  believe  that  a  new  and  "  in- 
dependent "  telephone  company,  for  example,  will  perma- 
nently lower  charges  and  will  remain  independent.  What, 
then,  should  be  the  policy  of  the  government  in  dealing 
with  these  industries?  Ought  we  in  the  United  States  to 
substitute  government  ownership  and  management  of  such 
monopolies  for  private  ownership  and  management?  Some 
of  these  jnonopolies  have  been  in  public  hands  so  long  that 
we  no  longer  think  of  them  as  a  possible  field  for  private 
enterprise.  Such,  for  instance,  are  the  roads  and  streets, 
the  post  office,  and,  in  many  places,  the  canals.     As  to  the 


MONOPOLIES   AND   MONOPOLY    VALUE         217 

others,  it  would  at  least  be  well  to  limit  the  charters  and  to 
make  such  a  reservation  of  public  rights,  including  the  right 
of  future  purchase  on  fair  terms,  as  will  later  permit  the 
government  easily  and  readily  to  make  suph  changes  as 
accumulating  experience  may  show  to  be  wise.  In  an  earlier 
(;hapter  on  the  Industrial  Stage  in  the  United  States,  we 
have  already  given  some  consideration  to  the  history  of 
public  poHcy  in  relation  to  these  monopolies,  postponing 
to  the  present  point  the  argument  usually  offered  in  favor 
of  the  policy  of  public  ownership. 

Advantages  claimed  for  Public  Ownership.  —  The  princi- 
pal advantages  claimed  for  public  ownership  of  such  monop- 
olies are  as  follows :  — 

1 .  Increase  and  Diffusion  of  Public  Prosperity.  —  A  general 
diffusion  among  the  community  of  the  great  incomes  now 
reaped  by  the  private  monopolies  will  tend  to  prevent  an 
undue  concentration  of  wealth  while  at  the  same  time  pro- 
moting general  prosperity.  Most  of  the  enormous  fortunes 
of  our  country  have  sprung  directly  from  natural  monopolies 
in  private  hands.  It  should  be  noted  that  if  such  private 
monopolies  are  taken  over  by  the  government,  the  income 
from  them  may  be  diffused  in  either  of  two  ways.  Charges 
may  be  placed  so  low  that  the  price  will  simply  cover  cost 
without  allowing  for  profits,  —  the  method  pursued  by  our 
post  office,  and  by  the  English  telegraph  service ;  or  a  profit 
may  be  derived  from  the  industries,  and  this  profit  may  then 
be  used  to  lower  taxes  or  to  benefit  the  people  in  other  ways. 

2.  Economy  and  Efficiency.  —  How  enormous  is  the  waste 
in  attempted  competition  in  the  field  of  natural  monopo- 
lies may  be  seen  on  every  side.  Indeed,  it  was  som§  years 
ago  estimated,  possibly  with  some  exaggeration,  that,  in 
railway  construction  and  operation  in  the  United  States 
during  the  preceding  half  century,  economic  resources  had 


218     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

been  wasted  which,  had  they  been  economically  applied, 
would  have  been  sufficient  to  build  comfortable  homes  for 
all  the  men,  women,  and  children  then  in  the  country.  There 
is  a  large  basis  of  reason  in  the  claim  of  those  who  maintain 
that  public  ownership  of  such  monopoHes  would  be  more 
economical  than  the  policy  of  private  ownership  and  manage- 
ment has  been. 

When  services  of  a  monopolistic  nature  are  performed  by 
the  public,  great  economies  can  often  be  secured  by  com- 
bining various  services,  such  as  water,  gas,  and  electric 
lighting.  Moreover,  a  better  management  is  likely  to  result. 
It  is  only  a  popular  superstition,  now  apparently  passing 
away,  that  private  enterprise  is  always  and  every^^here 
superior  to  public  enterprise.  The  fact  of  the  matter  is  that 
each  should  be  superior  in  its  own  natural  field. 

Nor  is  it  true  that  private  enterprise  alv/ays  excels  public 
enterprise  in  the  matter  of  initiating  improvements.  The 
American  post  office  blazed  the  path  for  American  express 
companies  in  developing  the  money-order  business.  The 
English  Postal  Savings  Bank  set  a  pattern  for  private  savings 
banks  in  the  establishment  of  branches  and  in  the  use  of 
stamps  posted  on  small  cards  for  savings.  In  recent  years 
many  great  technical  improvements  have  come  from  the 
managers  of  public  monopolies. 

3.  Purification  of  Politics.  —  Private  monopolies  must  be 
controlled  by  public  authority;  but  control  means  inter- 
ference with  private  business,  and  interference  begets 
corruption.  Scarcely  a  year  passes  that  the  country  is  not 
shocked  by  the  disclpsure^f  bnber^_aiidjcorruptiQn_  in  con- 
nection with  the  granting  or  extension  of  franchises,  or  in 
some  one  of  the  many  ways  by  which  monopoly  in  private 
hands  seeks  to  secure  privileges,  to  free  itself  from  duties,  or 
to  escape  from  deserved  punishment.    A  lawyer  prominently 


MONOPOLIES  AND   MONOPOLY   VALUE  218 

identified  with  monopolistic  concerns  has  declared  in  a 
public  address  that  the  "  ante-natal  tax  "  which  such  com- 
panies are  obliged  to  pay,  —  that  is,  the  bribery  necessary 
for  securing  franchises,  —  constitutes  a  regular  element  in 
the  expenses  of  their  business.  This  is  one  reason  why  our 
city  governments  are  expensive.  With  public  ownership 
and  management  of  such  monopolies,  public  interests  and 
private  interests  are  identified,  and  the  best  citizens  can  offer 
undivided  allegiance  to  the  cause  of  good  government. 

In  the  decade  1900-1910  the  American  people  came  to 
know,  as  never  before,  the  extent  and  variety  of  corruption 
practiced  by  private  owners  of  great  natural  monopolies. 
Thanks  to  the  so-called  "  muck-rakers,"  scandal  followed 
scandal  in  claiming  the  outraged  interest  of  the  public.  A 
point  was  reached  where  the  old  story  of  Diogenes  and  his 
lantern  could  provoke  only  a  rueful  smile.  The  result  has 
been  a  great  deal  of  legislation,  —  briefly  discussed  in  an 
earlier  chapter,  —  designed  to  secure  adequate  regulation  of 
private  monopoly  by  public  commissions  and  otherwise. 

4.  Will  Overthrow  Injurious  Social  Monopolies.  —  There 
seems  to  be  general  agreement  that  the  social  monopolies 
which  rest  on  patents  and  copyrights  are  advantageous  to 
the  public.  Trade-mark  monopoly,  public  consumption 
monopoly,  and  fiscal  monopoly,  on  the  other  hand,  are  forms 
of  social  monopoly  that  are  not  so  generally  accepted  with- 
out question.  Finally  special  privilege  monopolies  of  class 
one  are  losing  in  public  support,  while  special  privilege  monop- 
olies of  class  two  are  now  everywhere  admitted  to  be  dis- 
tinctly injurious  to  the  best  interests  of  society.  Some  of 
these  injurious  social  monopolies  have  been  made  possible 
by  special  favors  received  from  the  natural  monopolies  now 
under  consideration;  as,  for  example,  by  receiving  lower 
freight  rates  than  competitors  could  secure.    If  all  citizens 


220     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

could  be  assured  just  and  equal  treatment  at  the  hands  of 
natural  monopolies,  the  limits  of  competition  would  be  ex- 
tended, while  the  limits  of  monopoly  would  be  restricted. 
But  it  is  problematical  whether  such  just  and  equal  treat- 
ment can  be  hoped  for  while  natural  monopolies  are  in 
private  hands. 

Jevons's  Criteria.  —  The  English  economist  Jevons,  as  a 
result  of  careful  study  of  government  management  of  monop- 
oUes,  reached  the  conclusion,  in  his  "Methods  of  Social 
Reform,"  that  there  are  certain  general  principles  or  char- 
acteristics by  which  we  may  judge  what  monopolies  the 
state  may>  most  safely  undertake  to  manage.  These  char- 
acteristics may  be  briefly  summarized  as  follows :  —  The  busi- 
ness (1)  should  need  a  single,  all-extensive  system  for  efficient 
operation ;  (2)  should  be  of  a  routine  nature,  as,  for  example, 
is  the  business  of  the  post  office ;  (3)  should  be  of  such  a 
nature  as  to  be  subject  to  constant  public  scrutiny  and  criti- 
cism; and  (4)  should  require  a  relatively  small  amount  of 
capital  expenditure  in  proportion  to  the  amount  of  business 
done. 

As  regards  these  criteria,  it  may  be  observed  in  the  first 
place  that  they  afford  information  only  as  to  what  businesses 
the  state  is  most  likely  to  conduct  with  success,  —  such  success 
or  failure,  moreover,  being  here  regarded  solely  from  the 
point  of  view  of  the  private  business  manager.  In  other 
words,  there  is  no  place  in  this  statement  of  principles  for 
the  consideration  that  the  state  may  promote  the  social 
welfare  by  managing  business  at  what,  in  the  language  of 
the  private  entrepreneur,  would  be  called  a  loss.  Our  public 
highways  are  almost  everywhere  state-managed  monopolies, 
created  and  maintained  by  taxation,  not  by  fees  or  tolls. 
Judged  solely  by  the  standard  of  private  management, 
therefore,  they  do  not  constitute  a  successful  business.    Yet 


MONOPOLIES   AND   MONOPOLY    VALUE         221 

no  one  to-day  would  advocate  a  change  in  public  policy  which 
alone  could  make  their  management  "  successful." 

In  the  second  place,  it  may  be  observed  that  although  we 
may  be  unwilling  permanently  to  restrict  the  state's  activity 
within  the  "  ring  fence  "  thus  set  up,  yet  we  may  well  use 
Jevons's  criteria  as  an  aid  in  determining  the  order  in  which 
the  state  should  assume  the  management  of  natural  monop- 
olies. Furthermore,  it  will  appear  on  reflection  that  differ- 
ences in  the  degree  to  which  various  natural  monopolies  now 
conform  to  these  criteria  are  not  permanent,  but  are  ever 
changing.  Thus  the  railway  business  is  becoming  more  and 
more  susceptible  to  routine  management;  the  need  for 
its  service  becomes  every  day  more  widespread;  it  falls 
more  and  more  under  the  intelligent  criticism  of  the  public. 
We  may,  therefore,  question  whether,  judged  even  from 
the  point  of  view  of  private  business,  all  natural  monop- 
olies may  not  in  time  be  successfully  managed  by  the 
state. 

Conclusion.  —  The  advantages  that  might  result  from 
public  ownership  of  natural  monopolies  of  class  two  have 
been  explained.  While  recognizing  these,  we  must  not 
overlook  the  enormous  difiiculties  in  the  way  of  government 
ownership  and  control,  —  the  serious  problems  of  govern- 
mental organization  involved,  the  problem  of  improving 
the  civil  service  until  men  of  superior  capacity  find  permanent 
and  attractive  careers  in  the  service  of  governments;  of 
securing  greater  honesty  and  efficiency  in  the  public  business. 
In  the  case  of  government  railways  would  arise  the  problem 
of  rates  and  of  the  conflicting  demands  of  different  sections 
and  industrial  interests.  In  European  countries  these 
difficulties  have  proved  very  grave,  and  are  still  far  from  final 
solution,  as  indeed  is  the  case  in  our  own  country  with  pri- 
vate ownership  and  management. 


222      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  most  hopeful  advocate  of  public  ownership  of  such 
monopoHes  would  probably  admit  that  it  will  be  a  long  time 
before  all  natural  monopolies  pass  out  of  private  hands. 
Meanwhile,  there  will  remain  the  ever  perplexing  question 
of  regulating  the  granting,  extension,  and  renewal  of  fran- 
chises, and  of  the  public  control  over  such  undertakings.  It 
would  take  us  too  far  afield  even  to  mention  all  the  dijQScult 
and  perplexing  questions  arising  from  the  attempt  to  control 
these  natural  monopolies.  Especially  within  the  past  few 
years  have  the  legislatures  and  courts  of  state  and  nation 
been  confronted  by  these  perplexities,  which  seem  to  grow 
more  baffling  with  every  year.  To  take  but  the  single 
instance  of  price  or  rate  control,  it  is  clear  that  state  and 
federal  commissions,  legislatures,  and  courts  are  facing  a 
problem  of  the  utmost  difficulty,  if,  indeed,  the  problem  is 
not  absolutely  insoluble.  Shall  state  or  federal  commissions 
exercise  final  authority  in  fixing  or  limiting  rates  charged  on 
traffic  within  the  bounds  of  the  single  state?  How  shall 
such  rates  be  fixed  or  limited,  —  on  the  basis  of  "  cost  of 
service,"  value  of  commodities  carried,  or  on  the  principle 
of  charging  ''  what  the  traffic  will  bear  "  ?  Assuming  any 
one  of  these  bases,  shall  the  railways  be  permitted  to  charge 
rates  that  will  always  return  a  profit,  even  in  times  of  war 
or  industrial  depression?  What  is  a  reasonable  profit  to 
allow  the  roads?  Is  an  increase  in  the  value  of  their  road- 
beds, due  to  increasing  population,  to  be  counted  as  part  of 
their  "  investment,"  with  the  result  of  raising  rates  to  shippers 
and  final  consumers?  If  the  public  determines  rates,  must 
it  also  interfere  in  the  matter  of  wages  of  employees,  on  which 
rates  must  in  part  rest  ?  If  the  public  is  driven  to  interfere 
in  regulating  wages  and  conditions  of  employment  of  rail- 
way employees,  shall  the  men  continue  to  have  the  right 
to  strike?    Such  questions  as  these  could  be  multiplied  to 


MONOPOLIES   AND   MONOPOLY    VALUE         223 

fill  many  pages  of  this  text.  N*^w  ones  are  rising  year  by 
year.  Indeed,  no  sooner  does  one  of  them  seem  about  to 
be  answered,  than  it  in  turn  raises  another.  These  ques- 
tions were  never  more  urgent  than  they  are  now  in  our 
present  troubled  times. 

SUMMARY 

1.  The  essential  idea  in  monopoly  is  unity  of  action,  leading  to 

control  of  price  and  other  conditions. 

2.  Monopoly  value  differs  from  competitive  value  in  that  the 

supply  of  monopoly  gorxis  is  not  Hptfirminprl  hy  ppfaf^,  of  prr>- 
duction. 

3.  Monopoly  price  is   the  price  of  maximum  net  revenue.     In 

establishing  the  supply  and  the  price,  the  monopolist  dis- 
regards fixed  expenses;  hence  a  fixed  tax  on  monopoly  can- 
not be  shifted. 

4.  Monopoly  price  is  controlled  on  the  side  of  demand  bv  the 

wealth  and  purchasing  habits  of  consumers. 

5.  It  is  claimed  in  favor  of  public  ownership  of  natural  monopolies 

that  the  policy  diffuses  prosperity,  is  economical,  purifies 
politics,  and  overthrows  injurious  social  monopolies. 

6.  Jevons's  criteria  of  public  ownership  are :   need  of  a  single,  all- 

extensive  system  for  efficient  operation;  routine  nature  of 
business;  openness  to  public  inspection;  small  fixed  capital 
expenditure. 

QUESTIONS  FOR  RECITATION 

1.  Define  monopoly.     Name  and  define  the  different  classes  of 

monopoly.  Mention  some  monopolies  of  which  you  have 
knowledge,  and  explain  what  monopoly  advantages  they  enjoy. 

2.  Sum  up  in  a  brief  statement  the  peculiar  characteristics  of 

natural  monopolies  of  the  second  class.  Mention  some 
monopolies  of  this  class. 

3.  Show  by  a  numerical  illustration  and  by  diagram  how  monopoly 

price  is  determined.  Explain  the  difference  between  monopoly 
price  and  competitive  price. 

4.  Explain  differences  in  the  effect  of  different  methods  of  taxation 

of  monopolies. 

5.  What  advantages  are  claimed  for  public  ownership  of  natural 

monopolies?     What  difficulties  are  involved  in  such  a  policy? 

6.  State  the  law  of  monopoly  price  from  the  side  of  supply ;   from 

the  side  of  demand. 


224     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 


QUESTIONS   FOR   STUDY   AND   DISCUSSION 

1.  How  far  has  the  price  policy  of  the  Standard  Oil  Company  been 

influenced  by  public  opinion?  by  law?  How  near  to  the 
pure  monopoly  price  has  the  company  usually  come? 

2.  Is  it  better  for  the  American  people  to  pay  lower  prices  for  their 

goods,  or  to  pay  monopoly  prices,  assuming  that  part  of  the 
monopoly  profits  will  be  devoted  to  establishing  educational 
institutions,  pensions  for  college  teachers,  bureaus  for  sani- 
tary research,  and  the  like,  at  the  will  and  pleasure  of  the 
monopoUst  ? 

3.  What  result  would  you  predict,  when  a  city  taxes  a  street  rail- 

way monopoly  a  fixed  annual  amount  on  each  car  operated? 

4.  Is  political  corruption  in  city  and  state  and  nation,  —  so  far  as 

such  exists,  —  an  argument  for  or  against  public  ownership 
of  natural  monopolies? 

5.  "Private  monopoly  is  always  indefensible."     Would  you  qualify 

this  statement? 

6.  Explain  what  is  meant  by  the  statement  that  the  monopolist 

charges  the  highest  possible  price.     Qualify  the  statement. 

^-LITERATURE 

Bemis,  E.  W. :   Municipal  Monopolies,  pp.  660-680. 

Brown,  W.  J. :    The  Prevention  and  Control  of  Monopolies. 

Ely,  R.  T. :    Monopolies  and  Trusts,  Ch.  Ill,  pp.  102-104,  also 

Ch.  VI,  pp.  229-231. 
Hobson,  J.  A. :  Evolution  of  Modern  Capitalism,  pp.  156-160. 
Jenks,  J.  W. :    The  Trust  Problem,  pp.  24,  43,  53,  98. 
Jevons,  Wm.  Stanley :   Methods  of  Social  Reform,  pp.  279-280. 
Report  of  the  United  States  Industrial  Commission,  Vols.  I  and  IL 


MONEY 

Having  discussed  at  length  the  fundamental  principles 
on  which  exchange  and  value  rest,  we  pass  naturally  to  con- 
sider the  nature  of  the  complex  mechanism  by  which  exchange 
is  effected.  At  the  very  center  of  this  mechanism  stands 
money,  the  medium  of  exchange.  We  have  already  in  our 
historical  study  explained  how  from  the  custom  of  making 
gifts  men  passed  to  regular  exchange  by  barter,  how  from  bar- 
ter everywhere  grew  up  the  regular  use  of  some  one  thing 
or  some  few  things  as  means  of  making  exchanges.  With 
the  handicraft  stage  men  had  come  to  use  the  precious  metals 
for  this  purpose,  and  money,  in  the  modern  sense  of  the  word, 
thus  became  a  regular  institution. 

The  Definition  of  Money.  —  But  what  is  money  ?  When 
we  come  to  define  the  word,  we  find  that  usage  is  by  no  means 
uniform.  It  is  often  convenient  to  use  the  'popular  and  more 
general  meaning  of  the  term,  according  to  which  money  is 
anything  that  parses  freely  from  hand  to  hand,  as  a  medium 
of  exchange,  and  is  generally  received  in  final  discharge  of  debts. 
But  there  is  a  narrower  conception  based  upon  the  functions 
which  money  fulfills  in  the  modern  economy.  In  the  first 
place,  (1)  we  find  that  money  everywhere  serves  as  a  medium 
of  exchange.  This,  the  first  function  to  be  developed,  is 
everywhere  the  principal  function  of  all  kinds  of  money. 
Our  present  civilization  would  be  impossible  without  money 
as  a  medium  of  exchange.  Without  such  a  medium,  a  man 
Q  225 


226     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

with  a  horse  who  wanted  a  coat  would  be  obhged  to  hunt  for 
a  tailor  who  wanted  a  horse,  and  even  after  finding  him,  he 
might  be  unable  to  effect  an  exchange,  owing  to  the  inequality 
in  value  of  the  things  to  be  exchanged.  In  the  second  place, 
(2)  we  find  that  money  serves  directly  and  immediately  as  a 
denominator  or  namer  of  values.  In  other  words,  money  is 
the  "  common  language  of  value.'^  The  phrase  "  measure 
of  values  "  is  used  by  many  economists  to  characterize  this 
function,  because  they  hold  that  the  money  commodity  must 
have  value  in  itself,  and  that  the  value  of  other  commodities 
is  found  by  comparing  their  value  with  the  value  of  the 
money  commodity. 

This  second  function  springs  naturally  from  the  first,  for 
as  men  make  exchanges  commonly  for  some  commodity, 
they  naturally  form  the  habit  of  naming  the  values  of  all  ex- 
changeable things  with  that  commodity  as  one  term  of  the 
value  ratio.  That  this  function  may  be  best  fulfilled  there  is 
usually  provided  a  definite,  concrete  money  unit  hke  our 
gold  dollar,  which  consists  of  25.8  grains  of  gold  nine-tenths 
fine.  One-tenth  of  the  weight  of  gold  coins  consists  of 
an  alloy  of  baser  metals  which  is  formed  principally  of 
copper.  The  weight  of  pure  gold  is  therefore  23.22  grains. 
When,  having  such  a  unit,  we  say  that  a  commodity  is  worth 
$10,  we  mean  that  the  exchange  value  of  the  commodity  is  ten 
times  that  of  the  monetary  unit.  It  sometimes  happens  that 
men  name  values,  not  in  terms  of  the  money  actually  used, 
but  in  terms  of  some  money  which  has  been  in  earlier  days  the 
regular  medium  of  exchange.  Thus,  throughout  our  Eastern 
States  one  often  hears  values  reckoned  in  shillings,  though  it 
is  long  since  there  was  any  money  of  that  denomination 
coined.     Such  money  is  called  "  money  of  account.^' 

In  the  third  place,  (3)  money  serves  the  function  of  a 
standard  of  deferred  payments.     If  I  wish  to  sell  commodities 


MONEY  227 

er  services  to-day  to  one  who  can  pay  me  only  at  some  f  utm'e 
time,  it  is  of  the  utmost  importance  that  we  should  have  some 
agreed  standard  according  to  which  the  payment  should  be 
made.  This  function  of  money  is  usually  facilitated  by  hav- 
ing a  legal  tender  quality  attached  to  it,  though  such  a  legal 
tender  quality  is  by  no  means  necessary  to  the  fulfilling  of  the 
function.  By  the  use  of  the  term  "  legal  tender  "  we  mean  simply 
that  the  legislature  has  declared  that  anyone  having  a  debt  to 
pay  may  discharge  his  debt  through  the  "  tender  "  or  offer  of  the 
prescribed  commodity,  and  that  in  case  of  a  suit  at  law  the 
courts  will  declare  such  a  tender  to  have  been  a  legal  one.  It  is 
clear  that  the  third  function  is  only  an  extension  of  the 
second.  Some  authors  attribute  to  money  a  fourth  function, 
that  of  serving  as  a  store  or  receptacle  of  value,  so  that  the  value 
may  be  transferred  from  place  to  place  and  from  time  to 
time.  Thus  Roman  gold  money,  preserved  for  two  thousand 
years,  has  brought  its  value  down  to  our  own  time ;  and  gold 
money  taken  across  the  Atlantic  bears  with  it  its  stored- 
up  value. 

And  now  we  may  sum  up  what  has  gone  before  in  a  formal 
definition  of  money  in  the  stricter  sense  of  the  word.  Money 
is  any  commodity  that  serves  a^  a  medium  of  exchange,  as  a 
denominator  or  namer  of  values,  and  as  a  standard  of  deferred 
payments.  And  the  economists  who  regard  the  fourth  func- 
tioTT  of  money  as  essential  would  complete  the  definition  by 
adding  the  words  "  and  as  a  store  of  value."  The  meaning 
given  to  the  word  money  in  the  following  pages,  whether  pop- 
ular or  scientific,  will  in  each  case  be  evident  from  the  context. 

Qualities  Desirable  in  the  Material  of  our  Money.  — 
Many  things  have  been  used  as  money  at  one  time  or  another 
in  the  world's  history :  cattle  nearly  everywhere ;  furs,  es- 
pecially in  the  Northern  countries ;  oil ;  wampum,  among 
the  early  New  Englanders  and  New  Yorkers ;   tea,  at  Rus- 


228     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

sian  fairs ;  tobacco,  in  the  early  days  of  Maryland  and  Vir- 
ginia; many  baser  metals;  and  the  two  precious  metals, 
gold  and  silver.  Of  all  the  metals,  gold  and  silver  have  in 
civilized  nations  been  found  best  adapted  to  money  uses.  Of 
the  two,  gold  has  shown  a  special  fitness,  and  now  bids  fair 
to  survive  as  the  money  metal  of  the  future.  Nevertheless, 
silver  is  still  everywhere  used  in  large  quantities,  though 
among  advanced  nations  it  generally  occupies  a  subordinate 
position.  The  qualities  which  have  given  gold  and  silver 
their  predominance  for  use  as  money  are  precisely  those 
qualities  which  we  may  readily  recognize  as  the  qualities 
that  all  money  should  have.  In  the  first  place,  they  are  very 
generally  desired,  independently  of  their  money  use,  since  they 
can  be  used  in  the  arts  as  well  as  for  ornament.  This  fact 
gives  them  security  and  stability  of  value.  Whenever  their 
value  begins  to  fall,  their  use  for  other  purposes  than  that  of 
money  increases  and  so  prevents  the  fall  in  value  from  being 
as  great  as  it  otherwise  would  be.  Moreover,  this  stability 
of  value  is  further  secured  by  the  fact  that  the  annual  produc- 
tion of  these  metals  bears  so  small  a  proportion  to  the  entire 
amount  in  existence.  Gold  and  silver  are  almost  imperish- 
able. The  Director  of  the  United  States  mint  estimates 
that  31,626  tons  of  gold  and  480,843  tons  of  silver  had  been 
produced  in  the  world  down  to  the  end  of  1914.  He  estimates 
that  about  918  tons  of  gold  and  about  8796  tons  of  silver 
were  produced  in  1914.  Bearing  in  mind  the  durability  of 
both  metals  and  the  guarantee  of  careful  preservation  assured 
to  both  by  their  high  specific  value,  it  will  be  seen  that  even 
the  present  unprecedentedly  large  annual  production  repre- 
sents but  a  small  part  of  the  world's  total  surviving  stock. 
And  yet,  as  will  be  explained  later,  the  great  increase  of 
production  during  recent  years  has  exercised  a  marked  influ- 
ence on  all  the  problems  connected  with  money. 


MONEY  229 

The  high  specific  value  of  the  precious  metals  —  that  is, 
their  high  value  in  proportion  to  their  weight  and  bulk  — 
adapts  them  for  use  as  money  by  making  them  a  convenient 
store  or  receptacle  of  value.  Because  of  their  high  specific 
value,  the  cost  of  transporting  them  from  place  to  place  is 
slight,  and  therefore  their  value  varies  little  from  place  to 
place.  In  other  words,  they  have  a  high  degree  of  portability. 
Their  durability  and  indestructibility  are  also  important 
qualities,  while  their  extreme  divisibility  without  loss  of  value 
makes  it  possible  to  secure  a  medium  of  exchange  of  any  de- 
sired value,  however  small.  Their  malleability  renders  coin- 
age easy,  as  does  also  their  homogeneity,  by  virtue  of  which 
one  ounce  or  pound  is  always  just  as  valuable  as  any  other 
ounce  or  pound.  Moreover,  the  metals  and  the  coins  made 
from  them  are  readily  recognizable  on  account  of  their  pecul- 
iar ring  and  their  other  attributes,  and  are  therefore  well 
adapted  to  popular  use. 

Let  us  now  sum  up  these  qualities  which  are  found  espe- 
cially desirable  in  the  money  material:  they  are  (1)  com- 
modity value,  (2)  high  specific  value,  (3)  stability  of  value, 
(4)  uniformity  of  value,  (5)  cognizability,  (6)  durability, 
(7)  portability,  (8)  malleability,  (9)  homogeneity.  f 

Coinage.  —  When  the  metals  first  came  to  be  used  as  a 
medium  of  exchange,  they  passed  from  hand  to  hand  in  their 
rough  state,  as  "  dust  "  or  in  nuggets,  and  the  testing  of  the 
amount  and  fineness  was  left  to  the  parties  to  the  exchange. 
In  course  of  time,  private  individuals  of  note  occasionally 
stamped  or  otherwise  certified  to  the  weight  or  fineness  or 
both,  a  custom  which  still  obtains  in  some  parts  of  the  world. 
Gradually,  governments  took  over  the  work  of  providing  an 
authorized  currency,  and  systems  of  regular  coinage  were  de- 
veloped. In  attempting  to  improve  coins,  governments  have 
sought  first  of  all  to  prevent  counterfeiting  by  making  the 


230     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

coins  of  regular  and  uniform  sizes,  and  by  various  devices, 
such  as  elaborate  designs  upon  the  face,  milled  edges,  etc. 
In  all  this,  governments,  though  they  do  not  give  the  origi- 
nal value  to  the  money,  do  increase  the  value,  by  the  superior 
exchangeability  which  their  certification  confers  upon  it. 

When  the  government  at  its  mint  corns  for  private  persons 
any  metal  they  may  bring  to  it,  the  coinage  is  said  to  be  on 
private  account  or  free  coinage.  The  expression  "  free  coinage," 
therefore,  does  not  have  reference  to  the  cost  of  coining.  If  the 
government  coins  for  private  persons  mthout  charge,  coinage  is 
not  only  free  but  also  gratuitous.  Any  charge  by  the  mint  for 
coinage  is  called  mintage.  When  the  charge  is  just  sufficient 
to  reimburse  the  government  for  the  expense  of  the  work,  it 
is  called  by  the  French  name  brassage;  anything  in  excess  of 
such  a  charge  is  then  called  seigniorage.  When  the  govern- 
ment buys  the  metal  in  the  market  at  the  market  price  and 
coins  it,  the  coinage  is  said  to  be  on  government  account.  If 
the  face  value  of  the  money  thus  coined  exceeds  the  market 
value  of  the  metal  by  more  than  the  expense  of  coinage,  the 
difference  constitutes  another  form  of  seigniorage.  All  the 
great  industrial  nations  to-day  coin  gold  on  private  account 
and  silver  on  public  or  government  account ;  in  other  words, 
they  have  free  coinage  of  gold,  but  not  of  silver.  In  England 
and  the  United  States  the  coinage  of  gold  is  also  gratuitous : 
though  in  England  if  one  wants  the  coin  immediately,  one 
must  pay  the  Bank  of  England  l^d.  per  ounce. 

Governments  and  Money.  —  From  the  fact  that  govern- 
ments regulate  the  coinage  of  money,  coupled  with  the  fact 
that  they  often  make  it  a  legal  tender,  there  has  grown  up  in 
the  minds  of  many  people  the  erroneous  idea  that  govern- 
ments make  money.  As  we  have  seen,  all  the  functions  that 
make  money  what  it  is  can  be  fulfilled  and  have  been  fulfilled 
without  the  participation  of  government  at  all.     Govern- 


MONEY  231 

ments,  therefore,  do  not  make  money.  But  by  careful  coin- 
age to  prevent  counterfeiting,  by  stringent  laws  against  coun- 
terfeiting, and  by  conferring  a  legal  tender  power  upon  the 
medium  of  exchange,  governments  have  done  much  and  can 
do  much  to  increase  the  currency  or  exchangeability  of  money, 
and  hence  may  give  to  a  certain  weight  of  money  material 
an  increased  value.  Gold  and  silver  would  have  a  consider- 
able value  to-day  for  use  in  the  arts  and  for  ornament,  even 
if  they  were  not  used  as  money  at  all.  They  would  have  a 
very  high  value  as  commodities  and  as  money,  even  if  the 
government  should  leave  the  work  of  coinage  and  the  work 
of  debt  enforcement  to  private  honor.  But  it  cannot  be 
doubted  that  gold  and  silver  to-day  have  a  higher  value  than 
they  would  have  in  either  of  the  two  cases  just  assumed. 

Prices  and  the  Value  of  Money.  —  It  is  clear  from  what 
has  been  said  concerning  money  as  a  namer  of  value,  that  a 
change  in  the  value  of  the  money  unit  means  a  change  in  the 
general  prices  of  other  commodities.  To  say  that  prices  have 
risen  is  the  same  as  saying  that  a  dollar  has  become  cheaper ; 
i.e.  it  takes  more  dollars  to  buy  the  same  commodity. 
Again,  any  cause  that  lowers  prices  thereby  raises  the  value 
of  money.    Prices  and  the  value  of  money  vary  inversely. 

Prices  and  the  Quantity  of  Money.  —  But  is  there  any 
relation  between  the  quantity  of  money  and  prices ;  in  other 
words,  between  the  quantity  of  money  and  the  value  of  the 
money  unit  ?  When  prices  are  high,  it  is  evident  that  a  larger 
volume  of  the  medium  of  exchange  is  needed,  the  rapidity 
of  circulation  remaining  the  same,  than  when  prices  are  low. 
If  coats  are  $20  apiece,  it  takes  a  greater  quantity  of  the 
medium  of  exchange  to  buy  them  than  when  they  are  only 
$10  apiece.  This  is  a  fact  about  which  there  is  no  dispute. 
But  it  is  a  distinct  and  difficult  question  whether  an  increased 
quantity  of  the  medium  of  exchange  can  itself  make  prices 


232     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

high,  or  whether  it  is  the  high  prices  that  call  forth  the  in- 
creased quantity  of  medium. 

The  Quantity  Theory.  —  To  compare  and  discuss  the  dif- 
ferent theories  of  the  causes  that  determine  the  value  of 
money  is  beyond  the  scope  of  an  elementary  treatise,  and 
we  can  conj&ne  ourselves,  therefore,  to  the  quantity  theory, 
which  in  one  form  or  another  is  the  theory  most  widely 
accepted  in  the  United  States.  It  is  not  easy  to  state  the 
quantity  theory  briefly,  and  at  the  same  time  accurately,  but 
in  a  general  way  it  runs  as  follows :  Other  things  being  equal, 
the  vahie  of  money  varies  inversely,  and  general  prices  vary 
directly  with  the  quantity  of  money.  Stated  in  another  way, 
with  a  view  to  include  some  of  the  "  other  things  "  that  in 
the  above  statement  are  assumed  to  be  "  equal,"  we  might 
phrase  the  theory  as  follows :  Other  things  being  equal, 
the  value  of  money  and  the  general  price  level  will  be  determined 
by  the  balance  of  demand  and  supply  of  money.  By  demand 
for  money  is  meant  the  total  amount  of  money  work  to  be 
done,  i.e.  the  number  of  exchanges  to  be  effected.  With 
trade  brisk,  a  great  volume  of  commodities  is  produced 
and  exchanged,  and  there  is  a  strong  demand  for  money. 
Hence  unless  the  money  is  increased  in  amount,  or  the  rapid- 
ity of  its  circulation  is  increased,  or  unless  something  else 
takes  parr~oi'  its  work  of  exchanging,  each  piece  of  money 
will  have  to  do  more  exchanging,  and  it  can  do  this  only  by 
exchanging  each  time  for  more  goods,  i.e.  at  lower  prices. 
By  supply  of  money  is  meant  its  quantity  taken  in  connec- 
tion with  the  rapidity  of  its  circulation.  Now,  according 
to  the  theory,  if  the  general  state  of  business  is  thought  of 
as  unchanging,  while  the  supply  of  money  increases  in  either 
of  its  factors,  as  just  given,  there  will  be  less  money  work 
for  any  piece  of  money  to  do,  other  things  being  equnl;  any 
piece  of  money  will  have  a  lower  ratio  of  exchange  than  be- 


MONEY  233 

fore, — which  is  the  same  as  saying  that  prices  will  be  higher. 
To  go  a  step  farther,  we  may  say  that,  —  other  things  being 
equal,  —  if  demand  for  the  medium  of  exchange  increases 
faster  than  its  supply,  the  general  price  level  will  fall,  and 
lyice  versa. 

In  the  foregoing  statements  of  the  quantity  theory,  we 
have  used  the  phrase  "  other  things  being  equal/*  By  far 
the  most  important  among  the  "  other  things  "  is  the  use  of 
credit  to  replace  or  supplement  money  in  the  work  of  ex- 
changing. This  use  is  already  widespread  throughout  the 
world  and  is  rapidly  increasing.  Credit  in  exchange  is 
used  chiefly  in  two  ways :  first,  in  the  form  of  credit  money 
such  as  government  and  bank  notes;  and,  second,  by  the 
transfer  of  bank  deposits  that  results  from  the  use  of 
checks.  The  phrase  deposit  currency  is  coming  to  be  used 
to  describe  this  last  element  in  the  general  medium  of  ex- 
change. And  just  as  money  may  have  more  or  less  rapid 
circulation  or  "  turn  over,"  so  bank  deposits  may  be  used 
more  or  less  briskly  in  the  work  of  making  exchanges 
by  checks. 

To  expand  the  quantity  theory  further,  therefore,  we 
may  say  that  changes  in  the  general  price  level  depend  upon 
relative  changes  in  the  volume  of  trade,  as  compared  with 
changes  m  the  volume  and  rapidity  of  circulation  of  the 
currency  with  which  the  trade  is  carried  on,  this  currency 
consisting  wholly  or  chiefly  of  money  and  deposit  currency. 

The  Value  of  Money  and  the  Cost  of  Production.  —  The 
theory  holds  also  that  in  the  long  run,  the  value  of  money  is 
influenced  by  the  cost  of  production  of  the  precious  metals. 
Dear  money  and  cheap  goods,  it  is  said,  will  make  mining 
cheaper  and  more  profitable,  and  hence  will  tend  to  increase 
the  output  of  the  precious  metals.  Conversely,  cheap  money 
and  dear  goods  will  lessen  the  incentive  to  mining,  and  hence 


234      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

will  tend  to  lessen  the  supply  of  money  metal  or  diminish 
its  rate  of  increase. 

The  extent  of  the  practical  influence  of  cost  of  produc- 
tion upon  the  quantity  of  money  and  hence  upon  prices 
will  depend  upon  many  factors,  such  as  the  greater  or  less 
degree  of  chance  in  mining.  It  is  generally  agreed  that 
under  present  conditions  the  practical  influence  of  cost  is 
relatively  sHght. 

General  Prices  and  Prices  of  Individual  Commodities.  — 
It  is  to  be  particularly  noticed  that  we  have  spoken  of 
changes  in  general  prices,  or  of  changes  in  the  "  price  level." 
There  is  nothing  in  the  theory  that  would  be  inconsistent 
with  an  increased  value  of  money  coinciding  with  a  rise  in 
the  value  of  some  other  commodity  or  group  of  commodities. 
It  is  always  happening  that  while  general  prices  are  rising 
or  falling,  the  prices  of  some  commodities  are  moving  in  the 
opposite  direction.  Even  though  the  quantity  of  money 
were  very  greatly  and  very  rapidly  decreased,  the  difficulties 
of  producing  some  other  commodity  might  increase  more 
than  in  proportion,  with  the  result  that  the  value  of  that 
commodity,  measured  in  terms  of  money,  would  rise  in- 
stead of  fall. 

Paper  Money.  —  Our  discussion  of  money  material  and  the 
qualities  desirable  in  that  material  had  reference  of  course 
to  our  primary  metal  money.  Another  form  of  money  which 
is  used  extensively  in  modern  days  is  paper  money,  which 
usually  consists  of  written  promises  to  pay  on  demand,  given 
by  banks  or  by  the  government.  People  take  these  promises 
to  pay  and  use  them  as  money,  because  they  believe  that  the 
promise  will  be  kept ;  or  because  they  think  that  others  will 
accept  them  without  question ;  or  because  they  know  that 
the  notes,  ha\ing  been  made  legal  tender,  must  be  accepted 
for  debt  unless  otherwise  expressly  stipulated  by  contract; 


MONEY  235 

or  because,  as  is  the  case  with  most  kinds  of  paper  money, 
such  bills  or  notes  are  receivable  for  taxes.  Where  confi- 
dence in  paper  money  is  complete,  such  money  is  often 
preferred  to  metal  money,  because  more  convenient. 

If  the  student  will  read  carefully  what  is  engraved  on  the 
different  kinds  of  paper  money  circulating  in  the  United 
States,  he  will  readily  learn  its  nature,  and  will  discover  that  it 
is, of  two  general  kinds :  notes  of  national  banks  and  of  Federal 
reserve  banks,  and  notes  and  certificates  of  the  Federal  Govern- 
ment. The  paper  money  issued  by  the  government  is  of 
several  different  kinds.  Gold  certificates  and  silver  certifi- 
cates are  simply  pieces  of  paper  entitling  the  holder  to  demand 
and  receive  from  the  treasury  the  number  of  dollars  printed 
on  the  face  of  the  certificates,  in  gold  and  silver  respectively. 
On  the  other  hand,  the  so-called  "  greenbacks,"  or  United 
States  Notes,  —  about  $347,000,000,  —  which  grew  out  of 
the  exigency  of  the  Civil  War,  and  the  so-called  Sherman 
Notes,  or  Treasury  Notes  of  1890,  now  very  rare,  are  simply 
government  promises  to  pay  on  demand  the  amounts  named 
on  the  face  of  the  notes.  These  are  not  backed  up  dollar  for 
dollar  by  hard  money  in  the  Treasury,  but  are  protected  by 
a  reserve  fund  which  is  supposed  to  be  sufficient  to  meet  all 
demands  as  they  are  made.  National  bank  notes  and  the 
notes  of  the  new  Federal  Reserve  Banking  system  will  be  ex- 
plained in  the  next  chapter. 

Dangers  of  Irredeemable  Government  Notes.  —  It  is 
easy  to  set  printing  presses  to  work,  and  to  issue  money  in  un- 
limited amounts.  This  is  apparently  much  easier  than  taxa- 
tion as  a  means  of  paying  the  expenses  of  government,  and 
the  temptation  to  pursue  such  a  policy  has  often  promoted 
waste  and  extravagant  expenditure.  In  order  to  keep  the 
new  paper  in  circulation  it  is  always  necessary  to  make  it 
legal  tender.    Confidence  in  the  abihty  and  willingness  of 


236     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

government  ultilnately  to  redeem  the  paper  is  likely  to  de- 
crease. The  new  paper  currency  therefore  usually  depre- 
ciates until  it  is  worth  less  per  unit  than  the  old  metallic  cur- 
rency. Since  debtors  always  prefer  to  pay  their  debts  in  the 
cheapest  legal  tender  money  available,  the  paper  currency 
alone  will  be  used  in  business  transactions,  and  the  metallic 
currency  will  disappear  from  circulation,  going  to  other  coun- 
tries in  payment  for  imports  or  being  melted  down  for  use 
in  the  arts.  This  is  in  accord  with  the  well-known  law  laid 
down  by  Thomas  Gresham,  Queen  Ehzabeth's  finance  min- 
ister, which  says  that  when  two  kinds  of  money  of  the  same  nom- 
inal value  per  unit  are  both  legal  tender,  the  cheaper  unit  always 
drives  the  dearer  out  of  circulation.  Since  the  depreciated 
money  makes  prices  high,  all  kinds  of  fixed  incomes  such  as 
salaries,  interest  due  on  debts,  etc.,  will  evidently  have  less 
purchasing  power  or  buy  less  goods  than  has  formerly  been  the 
case.  This  is  a  great  inconvenience  in  international  trade, 
because  one  nation  does  not  recognize  the  legal  tender  quality 
of  another  nation's  paper  money,  and  foreigners  lose  faith 
in  a  paper  money  which  is  not  kept  at  par  with  the  metal 
money.  Governments  can  keep  their  paper  money  at  par 
by  redeeming  it  in  gold  whenever  gold  is  demanded.  In 
such  cases  paper  money  is  said  to  be  redeemable. 

Bimetallism 

It  is  probably  impossible  to  give  to  young  people  born  since 
1896  an  adequate  idea  of  the  bitterness  of  the  political  con- 
troversy of  that  year  over  the  question  of  bimetallism.  In 
many  respects  it  resembled  war,  and  it  led  to  frequent  and 
confident  prediction  of  civil  war.  Especially  difficult  must  it 
be  for  the  young  man  of  to-day  to  realize  that  less  than  a 
generation  ago  a  national  election  depended  upon  the  fact 


MONEY  237 

that  for  the  twenty  years  then  ending  prices  had  been 
faUing ! 

If  the  student  of  to-day  can  summon  sufficient  interest  to 
the  task,  we  shall  consider  briefly  "  what  it  was  all  about." 

To  constitute  a  system  of  bimetallism,  three  things  are 
necessary :  two  metals,  free  coinage  of  both  at  a  fixed  ratio,  and 
the  giving  of  full  legal  tender  quality  to  both.  Down  to  the 
nineteenth  century,  silver  was  still  the  usual  money  of  trade 
and  reckoning,  though  gold  was  also  used.  Governments  had 
generally  in  the  latter  part  of  the  period  coined  freely  the  two 
metals  at  a  fixed  ratio  of  weight.  A  frequent  ratio  was  15i  to 
1,  which  means  simply  that  the  governments  had  put  15i 
times  as  many  grains  of  silver  into  the  silver  coins  of  any 
denomination  as  into  the  corresponding  gold  coins.  At  the 
beginning  of  our  separate  existence  as  a  nation,  we  in  the 
United  States  chose  the  ratio  of  15  to  1,  changed  it  in  1834  to 
16.002  to  1,  and  again  in  1837  to  15.988  to  1.  This  ratio  in 
popular  speech  was  known  as  "  16  to  1." 

The  Latin  Monetary  Union.  —  The  European  ratio  was 
maintained  within  narrow  limits  with  free  coinage  of  both 
metals  for  about  seventy  years  during  the  nineteenth  century 
by  the  action,  first  of  France,  and  then  of  a  combination  of 
countries,  called  the  Latin  Monetary  Union,  in  which  France, 
Belgium,  Switzeriand,  and  Italy  were  most  prominent. 
Under  their  system,  everyone  who  had  gold  or  silver  in  any 
form  could  have  it  changed  to  money  at  the  established  ratio 
of  coinage. 

Limitation  of  the  Coinage  of  Silver.  —  About  1873,  how- 
ever, Germany  decided  to  change  from  silver  to  gold  mono- 
metallism, and  threw  upon  the  markets  of  the  worid  an  im- 
mense amount  of  silver  at  the  same  time. that  she  increased 
the  demand  for  gold.  In  the  same  year,  our  own  country 
dropped  the  silver  dollar  from  the  list  of  coins  to  be  struck  at 


238     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  mint,  thus  putting  us  on  the  basis  of  gold  monometal- 
lism, although,  as  a  matter  of  fact,  no  silver  dollars  had  been 
coined  for  years.  The  value  of  silver  rapidly  declined  and 
the  Latin  Union  soon  after  suspended  its  free  coinage.  To 
add  to  the  confusion,  large  discoveries  of  silver  at  about 
the  same  time  brought  about  a  great  and  rapid  increase  of 
the  supply.  The  result  of  these  changes  was  a  violent  de- 
parture from  the  old  market  ratio  between  the  two  metals, 
silver  falling  so  much  in  value  in  terms  of  gold  that  within 
recent  years  according  to  the  state  of  the  market  it  has  re- 
quired from  about  twenty-six  to  thirty-nine  ounces  of  silver 
to  purchase  one  of  gold. 

Results  of  Monetary  Changes.  —  These  changes  naturally 
resulted  in  lower  prices,  and  thus  virtually  increased  all 
debts,  and  produced  great  distress.  But  the  increase  in 
the  debts  was  only  a  part  of  the  mischief.  South  America 
and  the  Oriental  countries  being  on  a  silver  basis,  trade  had 
easily  been  carried  on  with  them  as  long  as  gold  and  silver 
readily  exchanged  approximately  at  an  established  ratio; 
but  when  the  ratio  began  to  fluctuate  widely,  an  uncertain 
and  disturbing  element  was  introduced  into  such  trade, 
rendering  it  highly  speculative,  and  therefore  on  the  whole 
less  profitable  to  the  world.  The  merchant  in  Liverpool 
who  sold  goods  to  a  merchant  in  India  would  agree  to  receive 
in  exchange  a  fixed  sum  of  silver  money ;  but,  as  it  was  neces- 
sary for  the  English  merchant  to  exchange  this  silver  for  gold, 
a  fall  in  the  value  of  silver  during  the  progress  of  the  trans- 
action might  bankrupt  him.  Under  these  conditions  expor- 
tation of  manufactured  goods  to  the  Orient  was  impeded. 

These,  in  brief,  are  some  of  the  difficulties  that  are  be- 
lieved by  many  to  have  resulted  in  great  measure  from  the 
general  limitation  of  the  coinage  of  silver.  Bimetallism  was 
proposed   as   a   remedy.     Under   bimetallism   government 


MONEY  239 

would  coin  at  a  fixed  ratio  all  gold  and  silver  that  anybody 
desired  to  have  coined ;  in  other  words,  government  would 
coin  both  gold  and  silver  on  private  account.  BimetalHc 
coinage  by  one  country  alone  is  called  national  bimetallism. 
It  is  the  general  view  of  economists  that  no  country  is  com- 
mercially powerful  enough  to  furnish  such  a  demand  for  both 
metals  as  would  be  necessary  to  maintain  parity  of  value  at 
any  coinage  ratio  yet  proposed. 

With  international  bimetallism,  however,  which  -means 
bimetallism  based  on  an  agreement  like  that  of  the  Latin 
Monetary  Union  before  1874,  the  case  is  different.  Econo- 
mists were  at  one  time  inclined  to  favor  such  a  monetary 
policy,  and  even  to-day  there  are  in  Europe  and  America 
some  economists  who  believe  that  such  international  action 
would  be  feasible.  They  believe  that  if,  for  instance,  Eng- 
land, the  United  States,  Germany,  and  France  should  enter 
into  such  an  agreement,  those  countries  could  maintain  the 
ratio.  International  bimetallists  remind  us  that  gold  and 
silver  are  used  principally  for  money,  and  that  owners  of  gold 
and  silver  would  be  obliged  by  the  international  agreement 
either  to  have  the  metal  coined  at  the  government  ratio,  or 
to  sell  it  in  the  market  for  use  in  the  arts.  But  the  arts  ab- 
sorb only  a  relatively  small  portion  of  the  annual  product, 
and  a  very  much  smaller  portion  of  the  total  existing  supply. 
It  is  therefore  maintained  that  governments  are  in  the  posi- 
tion of  monopolists,  and  by  agreement  could  maintain  a 
fixed  coinage  ratio. 

Recent  Monetaky  History 

Intemational  Monetary  Conferences.  —  The  strong  desire 
for  international  bimetallism,  felt  both  by  economic  theorists 
of  repute  and  by  practical  statesmen  in  many  lands,  led  to 


240     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

repeated  monetary  conferences.  The  most  noteworthy  of 
tliese  were  the  Paris  Conference  of  1878  and  the  Brussels 
Conference  of  1892.  But  these  conferences  did  not  result 
in  the  restoration  of  bimetallism.  England,  as  a  great  credi- 
tor nation,  led  the  opposition  to  all  plans  for  international 
action. 

Silver  Purchase  Acts  of  1878  and  1890.  —  No  great  state 
coins  both  metals  freely.  In  the  United  States  the  Bland- 
Allison  Act  of  1878,  providing  for  the  purchase  and  coinage 
of  a  limited  amount  of  silver,  was  followed  in  1890  by  the 
Sherman  Law,  a  compromise  measure,  which  provided  for 
an  increase  in  the  silver  purchases. 

Repeal  of  the  Sherman  Act.  —  For  two  or  three  years  there 
were  heavy  exportations  of  gold  from  the  United  States,  and 
as  a  result  it  was  commonly  claimed  that  if  the  Sherman  Act 
were  not  soon  repealed,  gold  exportations  would  continue 
until  the  United  States  would  be  driven  to  a  silver  basis. 
During  this  same  critical  period,  the  Indian  mint  was  closed 
to  free  coinage  of  silver,  and  the  price  of  the  metal  fell  within 
three  days  from  82  cents  to  67  cents  an  ounce.  Added  to 
this  was  the  fact  that  the  revenues  of  the  United  States  fell 
off  until  they  were  less  than  current  expenditures,  thus  creat- 
ing a  fiscal  deficit.  This  combination  of  circumstances  led 
to  a  special  session  of  Congress  in  the  late  summer  of  1893, 
which,  after  a  bitter  fight,  repealed  the  purchasing  clause  of 
the  Sherman  Act. 

The  Currency  Act  of  1900.  —  Between  1893  and  1900  the 
monetary  situation  gradually  improved,  although  for  two  or 
three  years  the  United  States,  in  order  to  protect  the  cur- 
rency, was  driven  to  repeated  issues  of  bonds  under  very 
humiliating  circumstances.  The  defeat  of  Mr.  Bryan,  the 
Democratic  candidate  for  President  in  1896,  who  ran  on  a 
platform  declaring  for  "  the  free  and  unlimited  coinage  of 


MONEY  241 

silver  and  gold  at  the  ratio  of  16  to  1,  by  the  independent  ac= 
tion  of  the  United  States,"  paved  the  way  for  a  new  currency 
act  which  was  passed  by  Congress  March  14,  1900.  This 
act  expressly  declares  that  the  gold  dollar  shall  be  the 
standard  of  value  in  the  United  States,  and  that  all  other 
kinds  of  money  are  to  be  maintained  at  a  parity  with  gold. 
It  further  requires  the  United  States  Treasurer  to  maintain 
a  special  reserve  fund  for  the  redemption  of  United  States 
notes.  This  fund  must  in  all  cases  amount  to  $150,000,000 
in  gold  or  in  gold  and  redeemed  notes.  If  the  amount  of  gold 
falls  below  $100,000,000  and  the  redeemed  notes,  which  con- 
stitute the  remainder  of  the  fund,  cannot  at  the  time  be  ex- 
changed for  "  free  "  gold  in  the  general  treasury,  short  time 
gold  bonds  may  be  issued  and  sold  to  make  up  the  deficiency 
in  the  reserve.  As  to  silver  coinage,  the  act  provided  for 
the  coinage  of  silver  dollars  from  the  already  existing 
stock  of  silver,  until  the  number  of  such  dollars  should 
equal  the  amount  represented  by  the  "  Treasury  notes  of 
1890,"  issued  to  pay  for  the  silver.  These  silver  dollars, 
or  the  corresponding  silver  certificates,  were  paid  out  in 
redemption  of  the  "  Sherman  notes,"  as  fast  as  such  notes 
were  presented  at  the  Treasury.  When  practically  all  the 
Sherman  notes  had  been  redeemed,  the  remainder  of  the 
silver  bullion  purchased  by  the  government  —  representing 
the  seigniorage  from  the  silver  coinage  —  was  coined  into 
subsidiary  silver. 

It  will  be  seen,  therefore,  that  by  the  terms  of  this  law, 
strong  provision  has  been  made  for  securing  parity  of  all 
parts  of  our  money,  and  for  strengthening  the  position 
of  the  United  States  as  a  country  of  gold  monometallism. 
Our  monetary  position  has  been  further  strengthened  by  the 
Federal  Reserve  Act,  which  will  be  explained  in  the  following 
chapter. 


242     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 


SUMMARY 

1.  Money  serves  as  a  medium  of  exchange,  as  anamer  of  values, 

and  as  a  standard  of  deferred  payments. 

2.  The  precious  metals  have  certain  desirable  qualities  that  have 

given  them  first  place  for  money  use. 

3.  Governments  do  not  create,  but  they  do  increase  the  value  of 

money. 

4.  The  quantity  theorists  hold  that  the  value  of  money  depends 

on  the  quantity ;  that,  other  things  being  equal,  increasing 
the  quantity  of  money  decreases  its  value;  and  decreasing 
the  quantity  increases  its  value. 

5.  BimetaUism  was  long  advocated  as  a  policy  to  secure  stability, 

but  recent  economic  tendencies  have  destroyed  practical 
interest  in  the  subject. 


QUESTIONS  FOR  RECITATION 

1.  Name   the   qualities   desirable  in   money.     Mention   different 

things  that  have  been  used  as  money. 

2.  Wha^t  is  coinage?     Free  coinage?     Gratuitous  coinage?     Bras- 

sage?Seignibrage? 

3.  ^Vhat  is  the  relation  of  government  to  money? 

4.  State  the  quantity  theory  of  the  value  of  money. 

5.  J^om  an  examination  of  actual  paper  money,  name  and  describe 

the  different  kinds  that  are  used  in  the  United  States. 

6.  What  are  the  evils  of  irredeemable  paper  money  ? 

7.  What  is  bimetallism?     International  bimetallism?     What  was 

the  Latin  Monetary  Union? 


QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  How  much  gold  has  been  produced  since  1900?  What  per- 
centage does  it  represent  of  all  the  gold  ever  produced  ? 

J.  Is  there  any  one  in  your  town  who  can  recall  the  first  check 
ever  used  in  the  town? 

3.  Did   greenbacks   drive   gold   out  of   circulation  in   California 

during  the  Civil  War?     Why? 

4.  In  what  qualities  is  gold  preferable  to  silver  as  a  money  metal  ? 

5.  What  is  the  present  market  price  of  silver  bullion?    What  is 

the  relation  between  the  bullion  value  and  the  money  value 
of  American  silver? 

6.  What  are  subsidiary  coins?  token  coins? 


MONEY  243 


LITERATURE 

Brown,  H.  G. :   International  Trade  and  Exchange. 

Fisher,  Irving :    The  Purchasing  Power  of  Money. 

Holdsworth,  J.  I. :    Money  and  Banking. 

Jevons,  W.  S. :    Money  and  the  Mechanism  of  Exchange,  Ch.  VIII 

(the  four  pages  on  Gresham's  Law). 
Johnson,  J.  F. :   Money  and  Currency. 
Kinley,  David :    Money,  A  Study  of  the  Theory  of  the  Medium  of 

Exchange,  especially  Chapter  V. 
Laughlin,  J.  L. :    The  Principles  of  Money. 
Scott,  W.  A. :  Money  and  Banking,  pp.  69-72. 
Walker,  F.  A. :   Money,  Part  I,  Ch.  I,  pp.  1-10 ;  also  Money,  Trade 

and  Industry,  and  International  Bimetallism. 
White,  Horace :  Money  and  Banking,  Part  I,  Ch.  II,  pp.  23-29. 


CHAPTER  V 
CREDIT  AND  BANKING 

What  Credit  Is.  —  We  have  seen  the  immense  develop- 
ment in  exchange  that  has  been  made  possible  by  the  use 
of  money,  —  a  development  resulting  in  the  division  and 
organization  of  labor  and  a  revolution  of  the  whole  economic 
life.  Yet  money  alone  as  a  medium  of  exchange  is  entirely 
inadequate  to  explain  the  magnitude  of  present  commercial 
transactions.  Great  as  is  its  advantage  over  barter,  money 
is  too  clumsy  an  instrument  for  many  modern  purposes. 
While  it  is  by  no  means  dispensed  with  in  our  own  day, 
money  is  primarily  characteristic  of  the  economic  stage 
preceding  our  own.  The  characteristic  instrument  of  ex- 
change in  our  day  is  not  money,  but  credit. 

Like  so  many  other  terms  borrowed  by  economics  from 
the  language  of  everyday  life,  the  word  "  credit  "  has  many 
meanings  and  shades  of  meaning.  One  of  the  commonest 
of  these  is  indicated  when  we  say  that  a  man's  credit  is  good 
or  that  he  has  good  credit,  by  which  we  mean  that  he  has 
the  reputation  of  paying  his  debts  and  has  the  ability  to 
do  so,  and  that  therefore  other  men  are  willing  to  sell  him 
goods  and  to  wait  for  their  pay  until  a  future  date.  Another 
important  meaning  of  the  word  refers  to  the  character, 
not  of  the  man,  but  of  the  transaction  itself.  The  transfer 
of  goods  with  the  expectation  of  future  payment  is  a  credit 
transaction.     This  is  the  idea  which  we  embody  in  the 

244 


v\ 

CREDIT   AND   BANKING  245 

word  "  credit "  in  the  science  of  economics.  We  may 
therefore  define  the  term  as  follows :  A  credit  transaction 
is  a  transfer  of  goods  for  a  promise  of  a  future  equivalent. 
First,  it  should  be  noticed  that  the  transaction  is  partly 
present  and  partly  future,  or,  in  other  words,  (1)  credit 
contains  an  element  of  time.  In  the  second  place,  it  is  to 
be  remarked  that  (2)  the  transaction  involves  confidence 
either  (a)  in  the  character  and  resources  of  the  borrower  or 
(6)  in  the  sufficiency  and  security  of  goods  which  he  may 
have  pledged  for  the  fulfillment  of  his  promise.  A  third 
factor  frequently  present  is  (3)  a  written  evidence  of  in- 
debtedness, given  by  the  borrower  to  the  lender.  This 
writing  constitutes  the  instrument  of  credit. 

The  Mechanism  of  Credit.  —  The  mechanism  of  credit, 
or  the  machinery  by  which  credit  operations  are  carried 
on,  consists  of  two  parts :  (I)  the  instruments  of  credit,  — 
the  evidences  of  indebtedness,  —  such  as  checks,  drafts, 
notes,  bonds,  etc. ;  and  (II)  the  institutions  of  credit,  con- 
sisting principally  of  banks  and  clearing-houses. 

I.  Instruments  of  Credit.  —  Among  the  instruments  of 
credit  the  simplest  and  most  extensively  used  is  the  (1)  check. 
A  check  is  an  order  upon  a  bank  by  an  individual  or  company^ 
requiring  the  payment  of  a  certain  sum  of  money  to  the  order 
of  a  person  named  or  to  the  holder  of  the  check.  In  this  form 
of  credit  the  element  of  time  plays  a  very  small  part.  If 
money  were  paid  instead  of  a  check,  the  person  receiving 
it  would  be  likely  to  deposit  it  in  a  bank.  Receiving  a 
check,  he  carries  it  to  the  bank.  The  element  of  credit 
here  prominent  is  the  trust  or  confidence  involved,  the 
confidence  that  the  check  will  be  honored  by  the  bank 
upon  which  it  is  drawn. 

Bankers  also  use  checks.  When  one  banker  gives  a  check 
on  another,  the  instrument  is  uMcally  called  a  (2)  draft,  and 


246     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

we  shall  so  use  the  word  in  what  follows.  Another  form 
of  draft  arises  when  a  company  or  an  individual  orders  the 
payment  of  a  sum  of  money  to  a  bank.  This  form  we  shall 
call  a  (3)  bill  of  exchange.  When  the  drawer  and  drawee 
of  a  draft  or  bill  of  exchange  live  in  the  same  country,  the 
instruments  are  called  domestic  or  inland;  otherwise  they 
are  called  foreign.  Both  these  terms  —  drafts  and  bills  of 
exchange  —  are  so  loosely  and  variously  used  that  the  reader 
must  usually  judge  a  writer's  meaning  from  the  context. 

A  fourth  form  of  instruments  of  credit  consists  of  (4)  notes, 
which  are  usually  promises  to  pay  a  certain  sum  of  money 
for  valvje  received,  under  conditions  named,  on  demand  or  at 
the  expiration  of  a  certain  period.  Here  the  time  element 
is  important,  as  is  indicated  by  the  fact  that  interest  is 
generally  paid  on  such  instruments.  Such  notes  are  of 
three  general  kinds,  according  to  the  character  of  the  maker. 
(a)  Individuals  and  companies  issue  promissory  notes  for 
payment  on  demand  or  within  a  certain  time.  (6)  Banks  in 
most  countries  issue  notes  which  commonly  pass  as  money 
and  which  have  a  different  legal  standing  from  that  of  the 
notes  of  individuals.  Such  are  the  national  bank  notes  and 
federal  reserve  notes  of  the  United  States,  (c)  Governments 
themselves  often  issue  notes  such  as  those  we  have  already 
discussed  in  treating  of  the  subject  of  paper  money.  Bank 
notes  and  government  notes  very  rarely  bear  interest. 

The  facsimiles  on  pages  247  and  248  will  help  the  student 
to  understand  the  nature  of  the  instnunents  which  have  just 
been  described. 

Ordinary  instruments  of  credit  do  not  circulate  freely 
like  money,  but  are  intended  to  be  used  primarily  in  one 
transaction;  yet  they  are  by  no  means  confined  to  this. 
Thus  checks,  drafts,  and  bills  of  exchange  often  pass  through 
many  hands,  and  notes  are  often  transferred  once,  twice,  or 


CREDIT   AND  BANKING 


247 


many  times.  With  bank  notes  and  government  notes,  how- 
ever, which  circulate  as  money,  the  case  is  quite  different. 
These  are  (a)  intended  for  general  use;  (6)  they  are  always 
drawn  to  bearer;    (c)  they  are  issued  in  fixed  and  convenient 


Facsimile  of  Bank  Check 


denominations;    and  (d)  the  credit  of  the  issuing  agent  is 
usually  taken  as  a  matter  of  course. 

Credit  transactions  between  individuals  usually  take  one  of 
the  two  following  forms :  (a)  usually  a  person  buying  goods 


PAY  TO  TH 

TO  FEDT 

i^mmm^Mff^ 

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.n      327 

TL  DOLLARS 

CA»H,CR 

MADlsoftrWilZ^^ 

''.f        ^'^       n_.n     .     4/^-- 

•    •••         •     •• 

•  «     •        ••   » 

r"  .*  »-.  w  • !  Vi- 

-RAL  RESERVE  BANK2-30 
OF  CHICAGO                      j 

''"''' \^&L\ 

Facsimile  of  a 

Draft 

on  credit  pays  the  person  from  whom  the  goods  are  bought 
by  money,  check,  or  draft ;  but,  instead,  (b)  the  seller  may 
"  draw  on  "  the  buyer  by  means  of  a  biU  of  exchange.    Let 


248     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

us  suppose  that  A  is  the  seller  and  B  a  buyer  in  a  distant 
place.    A  writes  an  order  upon  B  to  pay  a  bank,  C,  for  A's 


.SLiUAA^UA^  Z _. 

VatttS  r«««iT««  ana  obarg*  to  aovoant  «r 

To  ^Amk(^,lk'MM^^.C!c*'. )  :i 


■C.^^<jvy...,MLt<riA^ )    h.'^..p.mJLr 


Facsimile  of  a  Bill  of  Exchange 

account,  the  amount  of  the  debt  within  a  stated  time,  say 
thirty  days.  If  B  on  presentation  of  the  order  by  the  bank 
C  acknowledges  the  debt  and  agrees  to  pay  it,  he  writes 


%3.yJ4tt9.. .  Madiaon,  Wis-.-silfeuA^LAylJ ML©... 

...._ fii^^.iJiDMj^.. afterdate,4or  Value  Received, 

I  promise  to  pay   The    Commerciar  Natftnal   Bank  of  Madison,  or  order, 
BtTHE  COMMERCIAL  NATIONAL  BANK,  o;^ Madison,  Wisconsin, 

with  int^bst  ^ter. J. iJamMjA.bX  the  rate  of. — •yiLt^.f...per  «enb  p^  gimum  until  paid. 


_ .mau«...jk. 


Facsimile  of  a  Note 


"  accept  "  on  the  bill  and  signs  his  name.  The  instrument 
thus  becomes  legally  binding  upon  the  acceptor  and  is  now 
called  an  acceptance. 


CREDIT  AND   BANKING  249 

Checks  and  promissory  notes  may  be  transferred  by  indorse- 
ment. The  payee,  by  writing  his  name  on  the  back  of  the 
instrument,  orders  the  payment  of  the  money  to  another  per- 
son whom  he  may  name  in  writing.  By  thus  indorsing  the 
instrimaent,  he  becomes  responsible  for  its  payment.  The 
person  to  whom  such  an  instrument  is  indorsed,  or  the 
indorsee,  may  also  in  turn  become  an  indorser,  in  which 
case  he  also  assumes  similar  responsibility. 

Book  credit  (5)  is  another  form  which  is  extensively  used, 
especially  in  retail  trade.  When  goods  are  sold,  a  record 
is  kept,  or,  as  we  ordinarily  say,  the  goods  are  "  charged," 
a  bill  for  the  amount  being  sent  at  a  later  time.  Where 
two  persons  mutually  grant  book  credit,"^  as  is  often  the  case 
among  merchants  in  small  places,  only  balances  need  be 
paid  in  money  on  settling  day. 

II.  Institutions  of  Credit:  Banks  and  Clearing  Houses.  — 
Bankers  have  already  been  mentioned  as  middlemen  in 
credit  transactions.  They  are  sometimes  called  dealers  in 
credits,  and  indeed  there  is  little  that  they  do  which  is  not 
in  one  way  or  another  connected  with  credit.  But  banks 
are  not  mere  agents.  They  have  at  starting  the  money 
which  represents  the  capital,  and  as  time  goes  on  they 
receive  money  from  various  sources  in  the  regular  way  of 
business.  With  these  funds  they  are  prepared  to  discount 
and  buy  the  notes  of  their  customers ;  but  to  a  very  great 
extent  they  buy  such  notes  not  with  cash,  but  by  writing 
the  name  of  the  note  seller  on  a  page  of  the  bank  books 
and  crediting  him  thereon  with  the  proceeds  or  avails  of  the 
note,  i.e.  the  amount  paid  for  the  note.  The  note  seller  thus 
becomes  a  depositor  of  the  bank.  Note  that  in  modern 
banking,  therefore,  a  deposit  is  only  exceptionally  the  result 
of  an  actual  depositing  of  money,  though  in  early  times, 
as  the  word  indicates,  actual  physical  deposits  were  the 


250     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

rule.  To-day  a  deposit  is  usually  the  result  merely  of  an 
exchange  of  the  credit  of  the  individual,  in  the  form  of  a 
promissory  note,  for  the  credit  of  the  bank,  represented  by 
an  entry  in  the  bank's  books.  Banks  are  debtors  of  their 
depositors,  and  creditors  of  those  to  whom  they  lend  money. 
Their  source  of  profit  is  not  exclusively  nor  even  chiefly  their 
own  capital,  but  rather  the  exchange  of  credits  described 
above.  As  a  rule,  commercial  banlcs  either  pay  no  interest 
on  deposits  or  they  pay  interest  at  a  rate  considerably  lower 
than  that  charged  their  customers,  i.e.  their  rate  of  dis- 
count, the  difference  constituting  their  chief  source  of  profit. 

In  earlier  times  nearly  all  banks  in  the  United  States 
issued  notes  that  circulated  as  money.  Indeed,  such  note 
issues  were  commonly  regarded  as  the  principal  business  of 
banks.  Now  only  national  banks  and  Federal  Reserve  Banks 
are  able  profitably  to  issue  their  own  notes.  In  nearly  all  civ- 
ilized countries,  the  power  of  banks  to  issue  circulating  notes 
has  been  greatly  restricted,  and  the  niunber  of  banks  that  find 
a  source  of  profit  in  such  issue  is  constantly  diminishing. 

It  would  take  us  too  far  afield  were  we  to  enter  upon  a 
complete  discussion  of  the  various  kinds  of  banks  and  their 
precise  differences.  Briefly,  we  may  say  that  any  institu- 
tion that  (a)  discounts  notes  or  other  forms  of  commercial 
paper,  and  (6)  receives  and  holds  deposits,  is  a  commercial 
bank,  whether  or  not  it  issues  notes,  and  whether  or  not  it 
is  incorporated  by  law.  The  two  essential  functions  of 
banking,  then,  are  discount  and  deposit;  the  third  common 
function,  issue,  is  not  essential  or  universal.  When  the 
word  "  bank  "  is  used  alone  it  always  refers  to  an  institu- 
tion exercising  these  two  essential  functions.  Savings  banks 
are  therefore  not  commercial  banks.  The  four  classes  of 
commercial  banks  in  the  United  States  are  our  national 
banks,  numbering  in  1915  about  7500;   state  banks,  num- 


CREDIT  AND   BANKING 


251 


bering  about  14,000;  private  or  unincorporated  banks, 
numbering  about  1100;  and  loan  and  trust  companies,  num- 
bering about  1500.  Loan  and  trust  companies  are  incor- 
porated institutions  which  perform  many  of  the  functions 
of  commercial  banks  as  well  as  some  others,  resemblances 
varying  more  or  less  from  state  to  state. 

The  nature  of  banking  operations  will  be  made  clearer 
by  an  examination  of  the  following  statement  of  the  con- 
dition of  a  national  bank. 


Report  of   the  Condition  of   The  National  Bank  op 
N.  H.     At  close  of  business,  June  23,  1916 


Resources 


Liabilities 


Loans    and    Dis— ^ 

counts 
Overdrafts 
U.  S.  Bonds 
Federal  Res.  Bk. 

Stock 
Other  Bonds  and 

Securities 
Redemption  Fund  ^ 
Dep.     with     Ap- 
proved       Res. 

Agents 
Dep.    with    Fed. 

Res.  Bank 
Dep.    with    other 

Banks 
Nat.  Bk.  Notes  of 

other  Banks 
Gold    and    Silver 

Coin 
Legal  Tender  Notes 
Gold    and    Silver 

Certificates 
Checks  and  other 

Cash  Items 


Capital  Stock 
$192,706.92     Surplus 

29.48     Undivided  Profits 
30,000.00    Nat.  Bk.  Notes  out- 
standing 
6,000.00     Deposits 

61,492.26 
750.00 


37,960.97 
5,000.00 

17,695.16 

6,435.00 

9,567.00 
2,750.00 

5,651.00 

840.27 
$376,878.06 


$  50,000.00 
50,000.00 
18,417.89 

15,000.00 
243,460.17 


$376,878.06 


252      ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

Notice  that  on  the  liability  side  the  first  three  items  are 
liabilities  in  a  different  sense  from  the  last  two;  for  the 
capital  stock,  surplus,  and  profits  the  bank  is  Uable  to  its 
stockholders;  for  circulating  notes  and  deposits,  it  is 
liable  to  outside  persons.  Also,  notice  the  relation  between 
the  total  amount  of  cash  on  hand  and  the  deposits,  and 
compare  the  total  investment  of  the  stockholders  with  the 
amount  of  loans  and  discounts.  Finally,  notice  the  corre- 
spondence betw^een  deposits  and  loans  and  discounts. 

The  Banking  System  of  the  United  States.  —  Private 
and  state  banks  and  loan  and  trust  companies  operate 
under  the  laws  of  their  respective  states.  These  laws  in 
recent  years  have  been  generally  improved  in  the  light  of 
the  world's  banking  experience.  Indeed,  the  legal  provisions 
of  some  states  are  perhaps  as  carefully  framed  as  are  those 
of  the  federal  government.  But  regarding  the  matter 
broadly,  one  may  still  say  that  the  federal  banking  system 
is  superior  to  the  general  system  of  the  banks  of  the  com- 
monwealths. State  laws  are  too  numerous  and  various  to 
permit  of  theu*  detailed  description  here,  but  the  federal 
system  must  be  explained,  if  only  in  its  broad  outlines. 

At  the  outbreak  of  the  Civil  War,  the  federal  government 
found  itself  confronted  by  the  serious  financial  problem  of 
securing  adequate  revenue  for  the  prosecution  of  the  war. 
Unusual  revenues  would  be  required,  at  the  same  time 
that  the  revenues  from  import  duties,  which  had  long  con- 
stituted the  main  reliance  of  the  government,  were  bound 
to  be  hard  hit  by  the  war  itself.  In  this  emergency,  new 
customs  duties  and  internal  revenue  taxes  were  imposed, 
"  greenbacks  "  were  emitted  in  large  amounts,  and  bonds 
were  issued.  The  outbreak  of  a  war  that  threatened  the 
very  existence  of  the  government  created  an  extremely 
unfavorable  situation  for  marketing  the  bonds.    Partly  to 


CREDIT  AND   BANKING  253 

create  a  more  favorable  bond  market,  partly  to  secure  for 
the  people  a  uniform  system  of  bank  notes,  to  replace  the 
state  bank  notes  of  that  time,  the  federal  government 
passed  the  National  Bank  Act,  creating  a  system  of  national 
banks,  in  1863. 

Under  the  act  charters  for  twenty  years,  made  renewable 
for  like  periods,  were  granted  to  corporations  of  not  fewer 
than  five  individuals,  the  requirement  of  capital  and  surplus 
varying  with  the  population  of  the  town  or  city  in  which 
the  bank  was  to  operate.  These  banks  were  required  to 
invest  a  part  of  their  funds  in  the  purchase  of  the  bonds 
of  the  government,  against  which  they  «,re  permitted  to 
issue  their  notes.  The  notes,  thus  secured  by  bonds,  were 
further  protected  by  a  redemption  fund  at  Washington, 
created  and  maintained  through  the  payment  by  each  bank 
of  5  per  cent  of  it§..average  outstanding  circulation.  A  ten 
per  cent  annual  tax  was  laid  upon  all  other  bank  notes,  a 
tax  so  heavy  that  it  promptly  put  an  end  to  such  notes, 
as  was  intended.  National  banks  are  divided  into  three 
classes,  "  country  "  banks,  reserve  city  banks,  and  central 
reserve  city  banks.  Each  bank  is  required  to  maintain  a 
"  lawful  money  "  reserve  representing  a  fixed  percentage 
of  its  deposit  liabilities. 

On  the  whole  the  national  banking  system  of  the  United 
States  has  been  successful  in  securing  the  results  for  which 
it  was  designed.  It  certainly  aided  greatly  in  taking  and 
holding  a  large  part  of  the  bonded  debt.  It  has  given  us  a 
secure  system  of  note  issue.  On  the  whole  it  has  handled, 
eflficiently  and  safely,  the  banking  business  of  the  country. 
But  the  system  before  its  recent  modification  had  two  clear 
weaknesses.  First,  the  note  issue,  while  secure,  was  in- 
elastic,  —  or  rather  perversely  elastic,  contracting  when  it 
should  have  expanded,  and  expanding  when  it  should  have 


254      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

contracted.  Perhaps  even  more  important  is  the  fact  that 
the  scattering  of  the  country^s  hank  reserves  among  so  many 
banks,  coupled  with  the  rigidity  of  the  reserve  requirements, 
prevented  such  common  action  in  times  of  financial  or  mjone- 
tary  crises  as  might  have  prevented  panics  or  at  the  least 
have  minimized  the  resultant  industrial  depression. 

To  remedy  these  defects  in  the  system  the  Federal  Reserve 
Act  was  passed  in  December,  1913,  supplementing  and 
modifying  the  provisions  of  the  National  Bank  Act.  All 
national  banks  are  required  to  come  into  the  Federal  Re- 
serve system,  and  state  banks  are  permitted  to  do  so,  by 
complying  with  certain  provisions. 

At  the  head  of  the  system  stands  the  Federal  Reserve 
Board  of  seven  members  consisting  of  the  Secretary  of  the 
Treasury,  the  Comptroller  of  the  Currency,  and  five  others 
appointed  by  the  President.  An  Advisory  Council  of 
twelve  bankers  holds  occasional  meetings  at  Washington 
to  advise  and  confer  with  the  Reserve  Board. 

As  the  name  of  the  Act  indicates,  its  main  purpose  is  to 
secure  a  better  handling  of  bank  reserves.  For  this  purpose 
the  country  is  divided  into  twelve  sections  or  regions,  in 
each  of  which  is  established  a  Federal  Reserve  Bank.  The 
capital  of  these  banks  has  been  provided  by  the  member 
banks  in  the  several  districts,  each  such  bank  contributing 
an  amount  equal  to  6  per  cent  of  its  own  combined  capital 
and  surplus.  The  management  of  each  reserve  bank  is  in 
the  hands  of  a  board  of  nine  directors,  chosen  in  three  classes 
of  three  each,  one  director  being  in  each  case  the  Federal 
Reserve  Agent  of  his  district. 

Under  the  present  system  "  coimtry  "  member  banks  are 
required  to  keep  a  lawful  money  reserve  of  12  per  cent  of 
their  demand  deposits,  of  which  A  must  be  deposited  with 
the  Federal  Reserve  Bank;    ^  must  be  kept  in  its  own 


CREDIT  AND   BANKING  255 

vaults ;  while  the  remaining  ^  may  be  d;3tributeJ  in  any 
proportion  between  its  own  vaults  and  the  Federal  Reserve 
Bank.  For  reserve  city  member  banks,  the  lawful  money 
reserve  rises  to  15  per  cent,  and  the  corresponding  fractions 
are  A,  i^,  and  ^,  For  central  reserve  city  member  banks 
the  reserve  percentage  is  18,  and  the  fractions  t^,  ^,  and  ^. 
All  member  banks  must  also  keep  reserves  equal  to  5  per 
cent  of  time  deposits. 

The  Federal  Reserve  Banks  —  which  will  be  chiefly 
"  bankers'  banks  "  —  have  as  their  main  business  the  re- 
discounting  for  member  banks  of  "  commercial  paper " 
that  has  been  discounted  and  bought  by  them.  In  this 
way,  as  well  as  through  the  depositing  with  them  of  a  large 
part  of  the  reserves  of  the  member  banks,  the  Federal 
Reserve  Banks  will  be  able  to  "  mobilize  "  the  banking 
strength  of  each  district,  and,  in  an  emergency,  the  bank- 
ing resources  of  the  entire  country. 

Former  provisions  for  national  bank  notes  continue  in 
force,  except  that  national  banks  are  now  able  to  sell  their 
bonds  and  retire  their  note  circulation  more  rapidly  than 
they  could  before.  It  is  intended  by  the  Act  that  the 
national  bank  notes  will  ultimately  be  retired.  On  the 
other  hand,  the  Federal  Reserve  Banks  are  permitted  to 
issue  bond-secured  notes,  which  we  may  call  Federal  Re- 
serve Bank  notes,  —  and  a  more  elastic  type  of  notes  based 
on  the  security  of  rediscounted  commercial  paper  held  by 
them,  which  we  may  call  simply  Federal  Reserve  notes. 

Briefly  stated,  the  purposes  aimed  at  in  the  Federal 
Reserve  Banking  system  are :  (1)  centralization  and  mobiliza- 
tion of  the  country's  banking  power;  (2)  a  greater  degree  of 
centralization  of  administration  and  control;  (3)  the  estab- 
lishment of  an  open  discount  market,  for  the  easy  and  regular 
rediscount  of  commercial  paper;     (4)   the  greater  elasticity 


256     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

of  our  bank  note  circulation,  by  basing  it  largely  on  bank 
assets  rather  than  on  bonds;  (5)  lessening  of  differences  in 
bank  discount  rates  in  the  various  parts  of  the  country;  (6)  af- 
fording organized  aid  to  our  foreign  commerce. 

The  Federal  Farm  Loan  Act.  —  The  Federal  Reserve  Act 
was  designed  to  perfect  our  short  time  bank  credit  machinery 
for  all  classes  of  borrowers.  The  Federal  Farm  Loan  Act, 
which  became  law  July  17,  1916,  was  designed  to  provide 
means  whereby  farmers,  long  at  a  disadvantage  in  securing 
loans  for  the  purchase  of  land,  equipment,  etc.,  may  tap  the 
sources  of  funds  available  for  what  may  be  called  fixed  in- 
vestment. Its  purpose  is  to  mobilize  and  vitalize  credit 
through  a  qualitative  standardization  of  farm  mortgages, 
and  the  issue  of  bonds  thereon. 

These  bonds  are  issued  and  sold  principally  by  twelve 
regional  Federal  Land  Banks,  stock  in  which  may  be  held 
by  the  general  and  business  public,  the  federal  and  state 
governments,  and  by  local  groups  of  farmers,  known  as 
National  Farm  Loan  Associations.  Each  local  association, 
composed  of  not  fewer  than  ten  borrowing  farmers,  acting 
through  its  loan  committee  in  cooperation  with  a  federal 
appraiser,  makes  an  official  valuation  of  landed  property 
offered  by  any  member  as  security  for  a  loan.  Mortgages 
given  by  borrowing  farmers  pass  through  the  local  associa- 
tions to  the  Land  Bank,  where  they  become  security  for  tax- 
exempt  bonds.  The  proceeds  from  the  sale  of  these  bonds 
to  the  general  investing  public  filter  down  through  the  local 
associations  to  the  borrowers.  Federal  supervision  of.  the 
system  is  afforded  by  the  Federal  Farm  Loan  Board,  ap- 
pointed by  the  President. 

The  most  obvious  effect  of  the  operation  of  the  law  is  in  the 
strong  tendency  to  lower  the  interest  rates  on  farm  mortgage 
loans  by  facilitating  the  transfer  of  capital  from  city  to  coun- 


CREDIT  AND   BANKING  257 

try  and  from  those  sections  of  the  country  and  the  world 
where  capital  is  relatively  abundant  to  those  where  it  is  rela- 
tively scarce.  Moreover,  the  system  tends  to  equalize  inter- 
est rates  on  farm  loans  throughout  the  country,  inasmuch  as 
the  bonds  issued  by  any  one  of  the  twelve  banks  are  guaran- 
teed by  all  of  them,  both  as  to  principal  and  as  to  interest. 

Clearing  Houses.  —  Clearing  houses  were  originally  con- 
trived by  the  employees  of  banks  with  the  object  of  saving 
time  and  labor.  Banks  in  a  city  have  continual  dealings 
with  one  another.  A  regular  customer  of  a  bank  deposits 
with  it  all  the  checks  that  he  receives,  no  mg,tter  on  what 
bank  they  may  have  been  drawn.  It  therefore  happens  that 
every  bank  in  any  of  our  cities  receives  checks  every  day 
drawn  on  the  other  banks,  while  the  other  banks  receive 
checks  drawn  on  it.  Formerly  there  was  continual  running 
back  and  forth  among  banks  to  balance  their  accounts. 
Now  the  representatives  of  all  the  banks  in  clearing  house 
cities  meet  daily  in  the  clearing  house  and  exchange  their 
obligations,  only  the  differences  between  the  sums  due 
being  paid.  These  differences  are  paid  by  the  debtor  banks 
to  the  clearing  house,  and  by  the  clearing-house  in  turn  to 
the  creditor  banks. 

Clearing  house  statistics  illustrate  the  inadequacy  of 
money  alone  to  do  the  business  of  the  modern  industrial 
world.  The  total  transactions  of  the  clearing  houses  in 
the  cities  of  the  United  States  for  the  year  ending  Sep- 
tember 30,  1912,  amounted  to  $168,506,362,000,  or  about 
forty-six  times  as  much  as  all  the  money  in  the  country, 
bank  notes  included ;  for  the  money  in  the  country  July  1, 
1912,  in  the  United  States  Treasury  and  in  circulation,  was 
only  $3,648,870,651.  The  small  proportion  of  actual  money 
transfers  necessary  in  paying  clearing  house  balances  illus- 
trates the  same  fact.    Thus  in  the  decade  ending  September 


258      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

30,  1912,  the  New  York  clearing  house,  which  includes  65 
banks  in  its  membership,  cleared  transactions  amounting  to  an 
annual  average  of  $88,699,030,679,  by  making  money  pay- 
ments averaging  annually  only  $3,926,103,384.  Thus  the 
money  balances  averaged  only  4.42  per  cent  of  the  clearings. 

The  Advantages  of  Credit.  —  It  remains  for  us  to  sum  up  in 
separate  paragraphs  the  advantages  and  dangers  that  attend 
the  great  development  of  credit  in  modem  industrial  society. 

1.  Credit  saves  time  and  labor  by  furnishing  a  more  perfect 
and  convenient  means  of  payment  in  large  sums  and  between 
distant  places  than  is  furnished  by  the  precious  metals. 
Thus  in  international  trade,  relatively  small  sums  of  money 
have  to  be  sent  from  one  country  to  another,  only  balances 
being  paid  in  money. 

2.  Credit  saves  capital  by  taking  the  place  of  corresponding 
amounts  of  gold  and  silver.  In  this  way  society  is  enabled 
to  employ  a  larger  portion  of  the  precious  metals  for  other 
useful  purposes,  and  to  devote  to  other  productive  enter- 
prises a  great  amount  of  labor  that  might  otherwise  be  em- 
ployed in  still  further  increasing  the  world's  stock  of  gold. 

3.  Credit  renders  capital  more  productive.  Under  our  credit 
system  he  who  owns  or  controls  capital,  but  is  not  himself 
an  eflScient  producer,  can  transfer  it  for  a  compensation  to 
another  person  who  can  employ  it  productively,  and  thus 
both  debtor  and  creditor,  as  well  as  the  pubUc  economy,  are 
benefited.  Other  things  being  equal,  capital  is  loaned  to 
those  who  will  pay  the  most  for  it,  and  under  normal  con- 
ditions these  must  be  the  ones  who  can  employ  it  most 
productively.  There  are  evidently  two  sides  to  this  ad- 
vantage. On  the  one  hand,  as  we  have  just  said,  (a)  credit 
enables  those  who  have  savings,  biU  who  are  without  the  dis- 
posilion  or  ability  to  use  them  productively,  so  to  place  ilur 
etwmga  thai  they  themselveif  rtcem  benefit  vtkile  furthering 


CREDIT  AND   BANKING  259 

social  production.  On  the  other  hand,  (6)  credit  enables 
those  who  have  great  business  qualifications,  but  who  have 
inadequate  capital  or  no  capital  at  all,  to  employ  their  energies 
and  talents  for  their  own  benefit  in  furthering  the  welfare  of 
society.  In  many  cases  credit  brings  together  capital  with- 
out directive  power  and  directive  power  without  capital, 
and  thus  serves  to  unite  capital  and  labor. 

4.  Credit  furthers  the  accumulation  of  capital  by  gathering 
together  the  very  smallest  sums,  as,  for  instance,  in  savings 
banks.  Such  small  sums,  forming  in  the  aggregate  large 
masses  of  capital,  are  lent  by  those  who  ape  responsible 
for  them  to  corporations  and  other  productive  concerns. 
In  this  way  the  capital  itself  is  concentrated  while  its  returns 
are  scattered  widely  among  the  people.  Moreover,  credit 
furthers  the  accumulation  of  capital  by  promoting  thrift, 
since  it  both  helps  and  encourages  men  to  provide  for  emer- 
gencies and  for  old  age.  This  is  particularly  the  case  with 
institutions  that  supply  capital  to  the  poorer  classes,  and 
with  American  building  associations,  which  furnish  the  same 
classes  with  capital  for  the  construction  of  homes. 

Dangers  of  Credit.  —  But  we  must  not  overlook  the  dark 
side  of  our  credit  money.  Without  expanding  unduly  upon 
the  dangers  of  credit  we  may  mention  some  of  the  more 
important  of  them  as  follows :  — 

1 .  Credit  frequently  encourages  extravagance,  which  is  a  fruit- 
ful source  of  fraud  and  embezzlement.  Men  who  are  granted 
credit  often  overrun  reasonable  bounds,  and  then  in  their  de- 
spair resort  to  desperate  expedients  in  the  hope  of  release. 

2.  Credit  prompts  precarious  speculation.  —  Those  who 
speculate  with  the  savings  of  other  people  are  proverbially 
careless.  Our  entire  land  is  strewn  with  the  ruins  of  busi- 
nesses wrecked  by  men  who  have  mismanaged  the  wealth 
which  unwise  credit  gave  into  their  hands.     When  such 


260     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

management  assumes  unusually  large  proportions,  credit 
becomes  a  powerful  factor  in  precipitating  a  disastrous  panic. 
Some  writers  have  claimed  that  all  productive  credit  — 
credit  used  in  carrying  on  a  business  —  is  good,  and  that 
the  evils  of  credit  arise  only  in  connection  with  credit  for 
consumption,  that  is,  credit  which  enables  one  to  spend 
money  for  personal  gratification;  but  while  there  is  a 
modicum  of  truth  underlying  this  distinction,  the  line 
cannot  be  so  sharply  drawn.  Credit  for  consumption  does 
frequently  lead  to  extravagance,  but  it  also  enables  many 
a  young  man  to  develop  personal  powers  and  to  become  a 
great  artist  or  scholar ;  on  the  other  hand,  productive  credit^ 
while  normally  resulting  in  great  advantages  to  society, 
sometimes  opens  the  way  to  putting  business  at  the  mercy 
of  ignorance,  incompetence,  and  dishonesty. 

SUMMARY 

1.  Money  having  proved  inadequate  to  the  needs  of  modem  ex- 

change, credit  has  displaced  it  for  ordinary  large  transactions. 

2.  Credit  means  the  transfer  of  goods  in  the  present  for  a  promise 

of  an  equivalent  value  to  be  repaid  at  a  future  time.     Hence' 
there  are  two  fundamental  elements  to  be  distinguished: 
time  and  confidence. 

3.  The  chief  instruments  of  credit  are  checks,  drafts,  and  bills  of 

exchange,  promissory  notes,  bank  notes,  government  notes, 
and  "book  accounts." 

4.  Banks  are  institutions  for  facilitating  credit  transactions  and 

for    creating    credits;     clearing-houses    are    institutions    for 
facilitating  transfers  of  credit  among  banks. 
6.   The  American  banks  have  now  to  a  very  large  extent  been 
brought  within  an  organized  Federal  Reserve  system. 

6.  The  Federal  Farm  Loan  Act  is  designed  to  make  borrowing  on 

farm  mortgages  easier. 

7.  Credit  saves  the  time  and  labor  involved  in  money  payments, 

it  saves  capital,  promotes  the  accumulation  of  capital,  and 
makes  a  given  amount  of  capital  more  productive. 

8.  Credit  often  leads  to  speculation  and  fraud,  and  sometimes 

it  encourages  extravagance  and  waste  in  public  and  private 
oonsumption. 


CREDIT   AND   BANKING  261 

QUESTIONS   FOR  RECITATION 

1.  What  different  meanings  has  the  word  "credit"?     In  which 

sense  is  it  most  often  used  in  economics? 

2.  In  what  cases  is  there  but  little  time  advantage  in  credit? 

Mention  cases  in  which  the  element  of  confidence  is  very 
slight. 

3.  What  is  a  check?    A  bill  of  exchange ?     A  bank  draft?     What 

is  a  note?     A  bond?     What  is  the  advantage  of  a  note? 

4.  Describe  the  national  banking  system;    the  Federal  Reserve 

system. 

5.  What  effect  does  credit  have  upon  the  productiveness  of  capital? 

Why?     Upon  the  accumulation  of  capital?     How? 

6.  What  are  the  dangers  of  credit?     How  do  the  evils  to  society 

compare  with  the  evils  to  individuals?  ^ 

7.  What  is  a  bank?    What  functions  are  necessary  to  the  idea 

of  a  bank?     What  other  function  or  functions  do  some  banks 
exercise?     How  do  banks  reap  a  profit? 

8.  What  is  a  clearing  house  ?    About  what  is  the  extent  of  trans- 

actions through  the  clearing  houses  of  the  country?     How 
does  this  compare  with  the  amount  of  money  in  circulation? 


QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  Write  a  check.     Make  out  a  promissory  note ;   a  draft ;   a  bill 

of  exchange.     Examine  a  mortgage ;   a  bond. 
'2.   Visit  a  clearing  house  and  describe  its  procedure. 

3.  If  you  found  that  the  loans  and  discounts  of  a  bank  had  de- 

creased, what  other  item  would  you  expect  to  show  a  decrease? 
Why? 

4.  In  a  bank  statement  is  capital  set  down  as  a  resource  or  as  a 

UabiHty?     Why? 

5.  "A  bank  is  a  manufactory  of  credit."     Explain. 

6.  What  is  the  federal  reserve  city  of  your  district?    What  are 

the  limits  of  your  district? 

LITERATURE 

See  literature  at  close  of  preceding  chapters.     Also :  — 
Bagehot,  Walter :   Lombard  Street,  Ch.  II,  pp.  21-27. 
Cannon,  J.  G. :   Clearing-houses,  Ch.  XII. 
Conant,  C.  A. :   History  of  Modern  Banks  of  Issue. 
Dunbar,  C.  F. :   The  Theory  and  History  of  Banking,  Ch.  II. 
Scott,  W.  A. :   Money  and  Banking,  pp.  117-120. 
White,  H. :   Money  and  Banking,  pp.  240-255. 


CHAPTER  VI 
INTERNATIONAL  TRADE 

The  subject  of  international  trade  calls  for  somewhat  ex- 
tended study  before  we  leave  the  division  of  transfers  or 
exchange.  Nations  do  not  live  to  themselves  alone.  More 
and  more  with  the  passing  years  trade  is  overleaping  narrow 
local  limits  and  is  becoming  world-wide  in  extent.  Inter- 
national trade  is  always  in  the  last  analysis  trade  between 
pairs  of  individuals,  and  is  in  many  respects  precisely  similar 
to  trade  among  individuals  in  a  single  community  or  coun- 
try. But  there  are  certain  features  in  which  it  differs  so 
materially  from  trade  within  a  narrower  area  or  within  a 
single  political  unit  that  it  calls  for  special  treatment. 

In  the  present  chapter  we  shall  first  study  the  nature  of 
international  trade,  and  shall  conclude  with  a  discussion  of 
the  restrictions,  usually  in  the  form  of  tariff  duties,  laid  by 
nations  upon  international  commerce. 

I.  The  Nature  of  International  Trade 

Fundamentally  Exchange  of  Services  for  Services.  — 
Whenever  an  individual  in  one  country  sells  goods  to  an 
individual  in  another  country,  he  acquires  a  claim  for  money 
payment  just  as  he  would  if  the  purchaser  were  in  his  own 
community.  But  owing  to  the  difficulty  and  risk  of  sending 
money  back  and  forth  in  pa>Tnent  of  individual  claims  re- 
sulting from  innumerable  sales  and  purchases,  great  bank- 

262 


INTERNATIONAL    TRADE  263 

ing  houses  have  developed  a  system  by  which  the  greater 
part  of  such  transactions  are  effected  without  the  use  of 
money  at  all.  The  system  of  international  exchange  is 
quite  like  that  of  the  clearing  house,  which  has  already  been 
explained.  When  an  American  exporter  sends  goods  to  an 
English  importer,  there  are  two  methods  by  which  payment 
may  be  made.  More  commonly  the  exporter  "  draws  on  " 
the  importer  for  the  agreed  amount;  that  is,  he  writes  an 
order  upon  the  importer  to  pay  on  demand,  or  within  a 
specified  time,  the  amount  named  in  the  face  of  the  bill. 
This  bill  of  exchange,  attached  to  a  bill  of  lading  of  the 
goods  and  other  documents,  the  exporter  usually  sells  to  a 
bank,  which  thus  purchases  a  right  to  have  a  certain  amount 
of  money  paid  at  its  order  in  England.  The  other  method 
of  closing  such  a  transaction  is  for  the  English  importer  to 
go  to  an  Enghsh  bank  and  there  purchase  a  draft  drawn  by 
the  bank  upon  an  American  bank  in  favor  of  the  American 
exporter.  In  either  case,  if  the  transaction  stood  alone, 
money  would  have  to  cross  the  ocean  to  pay  for  the  goods. 
But,  as  a  matter  of  fact,  English  exporters  are  at  the  same 
time  shipping  goods  to  American  importers,  and  are  thus 
securing  counter  claims  upon  Americans.  It  is  evident 
that  if  the  claims  upon  the  one  side  equal  the  claims  upon 
the  other,  no  money  need  be  sent,  provided  the  various 
claims  are  brought  together  and  cancelled.  It  is  precisely 
this  function  that  banking  houses  doing  an  international 
business  perform.  They  buy  bills  from  exporters  and  sell 
drafts  to  importers. 

We  have  here  assumed  that  only  two  countries  are  parties 
to  the  international  exchange.  When  we  consider  the  case 
of  several  nations  or  of  all,  there  is  no  difference  except  in 
the  greater  complexity.  Thus  it  is  evident  that  if  A  in 
New  York  owes  a  sum  of  money  to  B  in  London,  while  C 


264     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

in  London  owes  the  same  amount  to  D  in  Paris,  and  E  in 
Paris  in  turn  owes  the  same  amount  to  F  in  New  York,  the 
debts  of  all  may  be  settled  without  a  cent  of  money  leaving 
any  one  of  the  countries. 

Because  of  England's  early  and  continued  leadership  in 
international  trade,  and  also  because  of  her  preeminence 
in  shipping,  drafts  on  London,  known  as  sterling  exchange, 
generally  have  the  widest  and  readiest  acceptance.  Thus 
a  Hong  Kong  merchant  is  likely  to  pay  a  New  Hampshire 
cotton  goods  exporter  by  an  order  on  a  London  banker 
rather  than  on  a  Boston  or  New  York  bank.  London  is 
therefore  often  spoken  of  as  the  "  world's  clearing  house." 

The  Rate  of  Exchange.  —  Perhaps  the  idea  of  an  exchange 
rate  may  be  understood  best  by  thinking  of  it  as  the  rate 
at  which  a  person  in  one  place  can  buy  money  in  another 
place.  In  our  everyday  experience  we  usually  find  that 
we  can  buy  $10  in  a  place  a  few  miles  away  by  paying  $10 
in  our  own  town.  In  other  words,  we  can  send  our  check 
for  $10,  which  will  be  cashed  without  discount  or  premium. 
We  might  say  in  such  a  case  that  exchange  between  the 
two  places  is  at  par.  But,  if  you  read  the  financial  columns 
of  the  newspapers,  you  will  note  that  inland  exchange  be- 
tween places  more  remote  is  often  above  or  below  par,  i.e. 
at  a  premium  or  at  a  discoimt.  Thus  a  New  York  paper 
may  quote  Chicago  exchange  at  a  discount  of  fifteen  cents, 
which  means  that  $999.85  in  New  York  will  then  buy 
$1000  of  Chicago  money.  The  case  is  essentially  the 
same  in  international  exchange.  Exchange  between  New 
York  and  Montreal  offers  no  difficulty  because  the  United 
States  and  Canada  have  the  same  monetary  unit.  When 
the  exchange  is  between  two  countries  having  different 
systems  of  money,  the  rate  of  exchange  has  the  same  mean- 
ing, the  only  difference  being  that  the  ratio  is  between  two 


INTERNATIONAL    TRADE  265 

different  money  names,  as  between  dollars  and  sovereigns, 
—  always  stated  in  terms  of  dollars  and  cents ;  or  between 
dollars  and  francs,  —  stated  in  terms  of  francs  and  cen- 
times, —  or  between  dollars  and  reichmarks,  —  stated  in 
terms  of  the  cents  paid  for  4  reichmarks,  etc.  Now,  since 
the  English  gold  sovereign  or  pound  has  the  same  number 
of  grains  of  fine  gold  as  $4.8665  in  American  money,  par  of 
exchange  between  JNew  ^ork  and  London  Is  said  to  be^ 
$4.8665.  That  is,  when  exchange  is  at  par,  a  London  pound 
will  buy  $4.8665  of  New  York  money  or  debt,  andT  con- 
versely $4.8665  in  New  York  will  buy  a  pound  jof  debt  or 
money  in  London.  ~  ~ 

Par  of  exchange  between  any  two  countries  is  the  rate  which 
brings  their  two  monetary  systems  to  an  equality. 

Whenever  exchange  between  any  two  countries  is  such  that 
a  resident  in  one  can  extinguish  a  debt  du£  in  the  other 
payment  representing  the  exact  gold  weight  of  the  value 
debt,  exchange  is  said  to  be  at  par. 

The  Balance  of  Trade.  —  Assuming  for  the  moment  that 
the  only  transactions  affecting  international  exchange  are 
the  exports  and  imports  of  commodities,  and  that  only 
two  countries,  say  England  and  America,  are  involved,  we 
can  see  that  if  at  any  time  one  country  —  America,  for 
example  —  is  importing  more  goods  from  England  than  it 
is  exporting,  the  "  balance  of  trade  "  is  for  the  time  "  against " 
America.  -  In  such  a  state  of  things.  New  York  banks  will 
have  many  demands  for  drafts  upon  London  and  few  offer- 
ings of  bills  on  London.  Conversely,  London  banks  will 
have  many  offerings  of  bills  on  New  York,  but  few  de- 
mands for  drafts  upon  New  York. 

But  it  is  the  purpose  of  banks  in  both  places  to  make 
drafts  balance  bills  in  order  to  avoid  sending  specie  in  pay- 
ment.   Hence  the  New  York  banks  will  seek  to  discourage 


h  that  V 
r  by  a  { 
of  the    \ 


266     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  demand  for  drafts  on  London  by  charging  a  higher 
price  for  them,  and  will  at  the  same  time  try  to  encourage 
the  offering  of  bills  by  paying  a  higher  price  for  them.  Lon- 
don banks  will  in  the  same  way  lower  the  price  offered  for 
bills  on  New  York  and  will  sell  more  cheaply  drafts  drawn 
by  them  on  New  York.  Exchange  is  then  said  to  be 
"  against "  New  York  and  "  in  favor  of "  London.  A 
New  Yorker  wishing  to  meet  a  debt  of  £l  in  London  will  be 
obliged  to  pay  for  the  necessary  draft  more  than  $4.8665. 
He  will  have  to  pay  a  premium.  A  London  debtor  at  the 
same  time  can  with  £1  extinguish  a  debt  of  more  than 
$4.8665  in  New  York. 

The  "  Gold  Points."  —  Except  under  very  extraordinary 
conditions,  —  such  as  a  great  war,  —  neither  New  York 
nor  London  bankers  will  charge  such  a  rate  for  drafts  or 
pay  such  a  rate  for  bills  as  will  make  it  profitable  for  in- 
dividual debtors  to  send  the  specie  or  bullion  instead  of 
appealing  to  the  banks.  But  there  are  even  narrower 
limits  to  fluctuations  in  the  rate  of  exchange.  The  bankers 
themselves  naturally  have  the  best  facilities  for  making 
shipments  of  money,  and  as  the  rate  of  exchange  rises  or 
falls,  a  point  is  reached  at  which  it  will  be  profitable  for 
certain  banks  that  specialize  in  the  business  to  send  the 
metal.  The  two  points,  above  and  below  par,  at  which 
metal  shipments  are  made  into  or  out  of  any  country  were 
long  known  as  the  "  specie  points,"  because  either  silver  or 
gold  could  thus  be  shipped ;  but  in  recent  years,  since  gold 
alone  is  now  used  to  settle  balances,  the  points  have  come 
to  be  called  the  "  gold  points."  As_-the.  bankers'  cost  of 
shipment,  including  freight,  insurance,  packing,  loss  of 
interest,  etc.,  is  now  about  two  cents  per  English  gold  pound 
on  average  shipments,  the  gold  points  in  English-American 
exchange  stand  at  about  $4.8465  and  $4.8865.    In  other 


INTERNATIONAL    TRADE  267 

words,  gold  is  likely  to  begin  leaving  New  York  when  ex- 
change'l'ises  above$4.8865,  and  is  likely  to  begin  leaving 
London  for^New^York  when  exchange  falls  below  $4.8465. 

Again  we  must  remind  the  student  that  for  the  sake  of 
simplicity  we  have  assumed  trade  to  be  confined  to  the 
two  countries  mentioned.  When  the  case  of  international 
trade  in  general  is  taken  into  account,  the  subject  becomes 
too  complicated  for  brief  explanation.  We  may  simply 
say,  then,  that  the  rate  of  exchange  between  New  York  and 
London,  London  and  Paris,  Paris  and  BerUn,  etc.,  is  affected 
not  only  by  the  volume  and  balance  of  trade  between  the 
two  countries,  but  also  by  the  volume  and  direction  of 
trade  balances  in  the  trade  of  the  other  nations. 

Automatic  Steadjdng  of  Exchan|;e.  —  As  a  matter  of  fact, 
gold  shipments  between  nations  are  surprisingly  small  and 
infrequent,  considering  the  magnitude  and  diversity  of  the 
trade.  This  is  because  there  is  constantly  at  work  an 
automatic  system  of  "  checks  and  balances  "  comparable 
to  the  delicate  contrivances  of  automatic  machinery.  Thus, 
to  illustrate,  as  soon  as  sterling  exchange  rises  in  New  York 
above  $4.8665,  every  prospective  American  purchaser  of 
English  goods  or  services  is  faced  by  the  prospect  of  paying 
more  than  $4.8665  of  American  money  for  £1  worth  of  such 
goods  or  services.  Whether  he  is  contemplating  the  im- 
portation of  English  books,  or  is  planning  a  visit  to  the 
English  Lake  Country,  he  is  warned  by  the  rise  in  the  rate 
of  exchange  that  he  must  now  pay  more  than  before.  Of 
course  few  know  or  note  the  fact,  but  in  the  immense  field 
of  possible  business  between  the  two  countries,  it  is  enough 
that  some  persons  do  know  and  realize  the  change.  Ameri- 
cans as  a  whole  will  buy  fewer  English  goods.  At  the  same 
time  and  by  the  same  change  every  possible  English  pur- 
chaser of  American  goods  of  any  sort  may  thus  learn  that 


268     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

he  can  extinguish  a  possible  indebtedness  on  better  terms. 
Thus,  if  he  is  thinking  of  buying  American  goods  Hsted  at 
$486.65,  he  may  discover  that  at  the  new  rate  of  exchange 
he  could  extinguish  the  debt  incurred  in  purchasing  them 
by  paying  in  London  less  than  £100.  Here  again  it  is  un- 
necessary to  assume  that  all  Englishmen  are  aware  of  the 
changed  rate  or  are  influenced  by  the  change.  But  it  is 
clear  that  the  rise  in  the  rate  makes  it  easier  for  Americans 
to  sell  to  England  and  harder  for  them  to  buy  from  England 
than  before.  The  resulting  stimulation  of  sales  and  check 
upon  purchases  will  increase  the  offering  of  bills  on  London 
against  English  purchases  and  lessen  the  demand  for  drafts 
on  London  in  payment  of  American  purchases.  This  in 
turn  will  tend  to  bring  the  rate  of  exchange  back  to  par. 

The  Safety  Valve.  —  If,  however,  this  automatic  check 
at  any  time  is  not  strong  enough  to  hold  exchange  within 
the  gold  points,  when  one  of  those  points  is  reached, 
the  "  safety  valve  "  of  gold  shipment  automatically  opens 
and  "  lets  off  the  steam."  Let  us  suppose,  for  example, 
that  sterling  exchange  has  risen  in  New  York  to  S4.89,  and 
that  considerable  gold  shipments  are  being  made  by  New 
York  bankers.  The  London  banks  find  their  gold  reserves 
increased  and  are  encouraged  to  increase  their  loans  to 
customers  in  the  form  of  greater  deposits.  New  York 
bankers,  finding  their  gold  reserves  depleted,  restrict  their 
deposits  by  calling  loans  and  granting  new  ones  more  re- 
luctantly. The  whole  country  in  each  case  feels  the  result, 
—  in  England  by  an  increase  in  the  medium  of  exchange,  — 
both  money  and  credit;  in  America,  by  a  corresponding 
restriction.  English  prices  tend  to  rise;  American  prices 
tend  to  fall.  Hence  results  an  even  greater  tendency  to 
increased  English  buying  in  America,  and  to  lessened  Amer- 
ican buying  in  England.    To  be  sure,  the  change  in  prices 


INTERNATIONAL    TRADE  269 

is  so  slight  that  it  is  not  ordinarily  noticed.  It  might 
perhaps  be  said  rather  that  Englishmen  desiring  to  buy 
American  goods  find  it  easier  to  get  the  "  money  *'  with 
which  to  buy,  while  Americans  are  finding  that  money  is 
"  tight,"  and  hence  buy  less.  In  whichever  way  the  situa- 
tion is  described,  the  practical  result  is  the  same,  to  pre- 
vent the  rate  of  exchange  from  rising  more  than  a  very 
little  above  the  gold  point  and  ultimately  to  bring  it 
back  to  par.  And  of  course  the  same  explanation,  with 
the  necessary  change  of  names  and  terms,  would  apply  to 
the  opposite  case  of  steriing  exchange  in  New  York  falling 
below  par. 

Actual  conditions  are  of  course  indescribably  more  com- 
plex. Trade  is  not  confined  to  two  nations;  international 
balances  depend  upon  other  things  as  well  as  upon  the 
transfers  of  goods;  the  currency  of  diiferent  nations  is 
not  in  all  cases  of  equal  stability  or  honesty ;  many  nations 
are  themselves  great  producers  of  gold  and  therefore  regular 
exporters  of  that  metal.  Still  it  remains  true  that  through 
the  operation  of  such  natural  causes  as  we  have  just  de- 
scribed, the  various  debts  of  one  nation  to  the  world  and 
the  debts  of  the  world  to  that  nation  do  in  the  long  run 
tend  strongly  to  balance;  and  that  gold  shipments  from 
nation  to  nation  are  relatively  small. 

Such  shipment  as  does  take  place  serves  the  economic  function 
of  distributing  and  redistributing  the  world's  stock  of  gold 
among  the  nations  according  to  their  only  slowly  varying 
monetary  needs,  in  sux^h  a  way  as  to  maintain  a  substantially 
even  general  price  level  throughout  the  industrial  world. 

The  above  explanation  should  make  it  clear  to  the  student 
once  for  all  how  ridiculous  is  the  common  idea  that  any 
nation  either  does  or  "can  become  rich  by  "  selling  more 
each  year  to  the  rest  of  the  world  than  it  buys,  storing  up 


270     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

the  gold  paid  on  balance."  Even  the  individual  man  in 
our  day  does  not  *'  get  rich  "  in  such  a  way.  If  he  is  paid 
more  than  he  pays  out  for  consumable  goods,  he  spends  the 
extra  money  at  once  in  buying  productive  or  other  goods. 
He  does  not  store  up  the  money.  It  must  be  admitted, 
however,  that  an  individual  could  get  rich  by  storing  up 
money  if  he  were  foolish  enough  to  choose  that  way,  and 
were  lucky  enough  to  find  the  things  or  services  he  could 
sell  more  valuable  than  the  things  he  had  to  buy.  But  he 
could  get  rich  in  this  way  only  because  his  "  pile  of  gold  " 
would  be  so  very  small  as  compared  with  his  country's 
"  pile  of  gold  "  and  mass  of  credit  that  prices  of  goods 
would  not  be  disturbed  appreciably  by  his  hoarding.  With 
nations,  as  we  have  seen,  the  case  is  different.  If  America 
could  —  as  she  cannot  —  go  on  year  after  year  selling 
much  abroad,  buying  little  from  abroad,  and  storing  up  the 
difference  in  gold,  the  result  would  simply  be  that  American 
prices  would  go  up  by  leaps  and  bounds.  As  a  people  we 
should  have  a  great  deal  of  money,  but  we  could  buy 
no  more  ^ith  our  gold,  —  we  should  be  no  richer.  Let 
it  be  repeated,  however,  that  we  could  not  do  what  we 
have  for  a  moment  assumed ;  for,  as  our  prices  rose,  it 
would  become  impossible  to  keep  on  selling  our  high- 
priced  goods  in  other  countries  or  to  prevent  our  people 
from  buying  their  goods  in  the  low-prjf e  markets  of  other 
countries. 

War  and  International  Exchange.  —  The  explanation  here 
given  of  international  trade  and  international  exchange  is  of 
-course  based  upon  the  assumption  of  peace  among  the 
trading  nations.  Modifications  would  obviously  have  to 
be  made  in  case  of  war.  Thus  during  the  great  European 
war  the  cost  of  gold  shipment  no  longer  exercised  a  decisive 
influence  in  determining  the  gold  points.     Instead,  the  gold 


INTERNATIONAL    TRADE  271 

points  may  be  said  to  have  been  determined  by  the  arbitrary 
action  of  governments  and  powerful  banking  coaUtions. 

During  that  war  the  beUigerent  nations  counted  it  a 
matter  of  life  and  death  to  keep  as  many  men  as  possible 
in  the  trenches.  With  their  labor  supply  thus  depleted,  the 
nations  found  it  almost  or  quite  impossible  to  produce  food, 
clothing,  and  munitions  for  their  soldiers  in  addition  to  the 
goods  required  by  the  workers  and  the  rest  of  their  people. 
Under  these  circumstances,  every  nation  tried  desperately 
to  draw  upon  the  productive  resources  of  neutral  peoples. 
But  they  were  obviously  in  no  position  to  pay  for  the  un- 
usual merchandise  imports  with  even  their  usual  merchandise 
exports.  They  might,  to  be  sure,  have  paid  for  part  of  the 
excess  by  heavy  shipments  of  gold ;  and  indeed  the  United 
States  during  the  first  thirty  months  of  the  war  did  import 
over  $600,000,000  of  gold.  But  "  the  balance  of  trade  in 
favor  "  of  neutral  nations  was  far  in  excess  of  this  amount. 
To  have  attempted  to  ship  more  than  this  amount,  —  in- 
deed the  shipment  even  of  such  an  amount,  —  was  of  almost 
equal  danger  and  disadvantage  both  to  the  belligerents  and 
to  the  United  States,  as  was  everywhere  seen  and  admitted 
by  intelligent  American  bankers. 

Under  these  circumstances,  the  rate  of  exchange  between 
New  York  and  London  fell  and  long  continued  below  $4.75, 
and  even  at  one  time  reached  $4.50.  A  simple  explanation 
would  be  to  say  that  for  the  time  being  England  was  un- 
able to  continue  paying  for  desired  imports  in  cash,  and 
was  therefore  compelled  to  pay  a  higher  price  for  the  goods, 
—  on  credit, —^  as  reflected  in  the  unfavorable  exchange, 
rate. 

When  the  London  rate  fell  below  $4.60,  the  diflSculties 
<rf  trade  became  so  great  for  both  countries  that  a  half- 
billion  dollar  Anglo-French  loan  was  negotiated  with  Amer- 


272      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

ican  bankers.  This  provision  for  regular  and  national 
credit,  taking  the  place  of  the  earlier  irregular  and  individ- 
ual credit,  enabled  English  importers  to  buy  American  goods 
on  more  favorable  terms,  —  in  other  words,  raised  the  rate 
of  exchange  nearer  to  parity. 

During  the  nineteenth  century  and  the  early  years  of  the 
twentieth  centm-y,  English  shipping  had  been  so  dominant, 
and  English  investment  and  commerce  had  been  so  great 
and  widespread  over  the  earth,  that  it  had  become  cus- 
tomary to  make  payments  everywhere  by  drafts  or  bills 
on  London,  drawn  in  terms  of  pounds,  shillings,  and  pence. 
Thus,  a  Chinese  importer  would  pay  even  an  American 
or  French  exporter  by  a  draft  drawn  on  London.  The  dis- 
turbance wrought  by  the  war  threatened  the  continuation 
of  this  practice.  New  York,  the  money  capital  of  the 
greatest  and  wealthiest  neutral,  offered  certain  advantages 
as  an  exchange  center  or  world's  clearing-house,  and  to  an 
increasing  extent  drafts  in  payment  of  international  pur- 
chases were  drawn  on  that  city,  in  terms  of  dollars  and 
cents.  This  is  what  is  meant  when  it  is  said  that  the  great 
war  threatens  to  substitute  "  dollar  "  exchange  for  sterling 
exchange  in  international  trade. 

Peculiarity  of  International  Trade.  —  As  was  said  at  the 
beginning  of  this  chapter,  international  trade  is  not  funda- 
mentally different  from  other  trade  or  commerce.  But  it 
has  certain  features  which  are  in  varying  degree  peculiar. 
Labor  and  capital  move  from  place  to  place  or  from  industry 
to  industry  with  a  far  greater  degree  of  freedom  within 
national  boundaries  than  across  national  boundaries.  Differ- 
ences of  language,  customs,  and  laws,  ignorance,  fear,  prej- 
udice, poverty,  sentiment;  these  and  a  host  of  other  in- 
fluences stand  in  the  way  of  migration  of  labor  and  capital 
from  country  to  country. 


INTERNATIONAL    TRADE  273 

Capital  on  the  whole  is  probably  more  mobile  than  labor. 
Both  move  more  freely  from  some  countries  than  from 
others ;  more  freely  to  some  countries  than  to  others.  Both 
move  more  freely  at  some  times  than  at  others.  On  the 
other  hand,  freedom  of  movement  is  of  course  not  complete 
even  within  a  single  country.  A  New  England  worker  is 
tied  to  his  town,  state,  and  section  by  a  multitude  of  ties. 
Capitalists  who  have  made  their  money  in  pork  may  not 
be  eager  to  invest  in  establishing  a  "  Journal  of  Opinion  " 
or  a  "  Journal  of  Civilization."  But  allowing  for  all  these 
difficulties  in  the  way  of  a  hard  and  fast  classification,  it 
none  the  less  remains  true  that  labor  and  capital,  generally 
and  in  a  peculiar  degree,  are  nationally  confined.  And  this 
broad  fact  has  necessitated  certain  economic  explanations, 
certain  economic  theories,  which  we  must  now  seek  to  under- 
stand. 

The  Doctrine  of  Comparative  Costs.  —  The  first  of  the 
theories  to  which  we  have  just  referred  is  known  in  economics 
as  the  "  doctrine  of  comparative  costs."  It  may  be  briefly 
stated  as  follows:  trade  between  any  two  nations  is  deter- 
mined, not  by  difference  in  the  absolute  cost  of  producing  the 
goods  exchanged,  but  by  difference  in  their  comparative  cost. 
Specifically,  each  nation  will  produce  for  export  those  goods 
in  the  production  of  which  it  enjoys  the  greatest  comparative 
advantage,  or  suffers  the  least  comparative  disadvantage.  And 
now  to  illustrate  and  explain. 

Let  us,  as  before,  assume  that  there  are  only  two  countries, 
A  and  B,  and  let  us  assume  further  that  in  each  country 
only  two  economic  goods  are  concerned,  x  and  y.  Let  us 
assume  further  that  in  A,  1  unit  of  x  can  be  produced  with 
1  day's  labor,  and  1  unit  of  y  with  2  days'  labor;  while 
in  B,  1  unit  of  x  requires  2  days'  labor,  and  1  unit  of  y 
requires  5  days'  labor. 


274     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

If  trade  were  determined  by  difference  in  absolute  cost, 
,no  trade  could  take  place  on  these  assumptions  between 
A  and  B.     A  would  produce  and  consume 
■^  ®     both  X  and  y,  which  would  exchange  within 

*  1  "^ —  2     the  country  in  proportion  to  their  absolute 

y  2  — ^  6     cost,  i.e.  in  the  value  ratio  of  2  units  of 

X  for  1  unit  of  y.  B  would  produce  and 
consume  both  x  and  y,  which  would  exchange  within  the 
country  at  the  value  ratio  of  2^  units  of  x  for  1  unit  of 
y.  To  test  the  matter  numerically,  let  us  assume  in  each 
country  2100  days'  labor  available  in  any  period  for  pro- 
duction. Assuming  now  for  a  moment  that  each  country 
produces  both  goods,  let  us  see  how  the  case  would  stand. 
In  A  700  days  spent  in  producing  x  would  give 

700  units  of  a: ;  , 
1400  days  spent  in  producing  y  would  give 

700  units  of  y. 
In  B  600  days  spent  on  x  would  result  in 

300  a:; 
1500  days  spent  on  y  would  result  in 

300  y. 
Without  trade,  then,  A  could  have  by  the  assumed  division 
of  its  labor,  700  y  +  700  y, 

and  B  could  have     300  x  +  300  y. 

And  now  let  us  suppose  instead  that  the  doctrine  of  com- 
parative cost  is  correct,  according  to  which  A  would  produce 
and  export  y,  while  B  would  produce  and  export  x.  A's 
2100  days'  labor  would  give  1050  units  of  y.  If  she  kept 
and  consumed  only  what  we  have  assumed  in  the  first  case 
she  would  have  had  for  consumption,  she  would  have  left 
350  units  of  y  for  export  and  would  gain  by  the  trade  by 


INTERNATIONAL    TRAD 


275 


importing  in  exchange  anything  more  tl  Ian  700  x.  B  in 
the  same  way  would  produce  with  2100  days'  labor  1050  x ; 
and  if  she  kept  for  consumption  the  same  ramount  as  in  the 
illustration  above,  300  Xy  she  would  ha\^  left  750  x  for 
export,  and  would  gain  by  the  trade  by  importing  in  ex- 
change anything  more  than  300  y.  Bringing  the  two  to- 
gether, now,  we  find  that  A  can  affori;^  to  sell  350  y  for 
anything  above  700  x,  while  B  can  afford  to  sell  750  x  for 
anything   more    than   300  y.    Between   these   two    value 


^.      700/     1\        ,  300/     2\ 
ratios  — (  ==-     and  — [  =- 
350  V     2  J  750  V     5/ 


i.e.  the  ratios  of*  absolute 


costs  in  the  two  countries  respectively,  —  both  nations  can 
gain  by  exchanging.  Where  the  ratio '  of  exchange  —  in 
other  words,  the  international  values  —  would  stand  in  such 
a  case,  and  how  the  ratio  would  be  determined,  remain  to 
be  considered  later.  For  the  moment  let  us  center  our 
attention  upon  the  fact  here  demonstrated :  Even  though 
in  one  of  two  countries  the  absolute  cost  of  production  of  every 
commodity  were  greater  than  in  the  other,  yet  exchange  would 
take  place  between  them  if  the  comparative  costs  were  different^ 
the  one  country  producing  and  exporting  the  commodities  in 
the  production  of  which  it  had  the  least  relative  disadvantage, 
and  importing  in  exchange  commodities  in  the  production  of 
which  the  other  country's  relative  advantage  was  greatest. 
And  the  ratio  of  exchange — in  other  words,  the  value  —  would 
in  each  case  be  somewhere  between  the  differing  ratios  of  ab- 
solute cost  in  the  two  countries. 

International  Values.  —  We  are  now  prepared  to  consider 
the  second  of  the  theories  or  explanations  that  arise  from 
the  immobility  of  labor  and  capital  as  between  nations.  If 
goods  do  not  necessarily  exchange  in  international  trade 
in  the  ratio  of  their  cost  of  production,  what  does  deter- 


Ef^Ml'^  PLES  OF  ECONOMICS 

uiii  leir  ratio  of  exchange?     Wa 

nt  the  ^'        or  value  may  be  anywhere 

lute  costs  that  would  obtain 

)mmodities.     Let  us  now  go 

n  one  or  two  countries  just  beginning 

•  *  i?  found  that  the  greatest  satis- 

;:  ;;  w  cotton  and  manufactured 

ilk  are  produced  by  an  exj     tliture  of  labor  indicated  re- 

^"    '     t,.,  1-  .......  ^  pouiKi  and  50  cents  a  yard,  but 

atrj'  it  is  just  worth  while  to  produce 
.^c  i>«iAiic  cuiiiixAiXiiUcs  at  10  cents  a  pound  and  75  cents  a 
yard  respectively.  Assuming  these  to  be  the  only  two 
commodities  to  be  exchanged  and  ignoring  the  cost  of 
transportation,  we  may  suppose  matters  to  proceed  as 
follows :  Silk  will  be  sent  from  the  first  country  to  the 
second  in  exchange  for  cotton.  The  price  of  the  silk  will 
be  somewhere  between  50  and  75  cents ;  that  of  the  cotton 
between  10  and  15  cents.  The  precise  value  in  each  case 
will  be  such  that  in  the  long  run  the  values  of  the  cotton 
and  silk  exchanged  will  be  equal.  Suppose  it  were  not  so ; 
imagine  such  prices  that  $1,000,000  worth  of  silk  would 
be  exported  from  the  first  country  and  only  $500,000  w  orth 
of  cotton  imported.  At  first  the  balance  might  be  paid 
in  gold,  but  the  drain  of  gold  from  the  second  country 
would  so  lower  prices  there  as  to  discoiu'age  the  further 
importation  of  silk,  and  the  influx  of  gold  into  the  first 
country  would  so  raise  prices  as  to  encourage  the  importa- 
tion of  cotton  into  that  country.  This  would  continue 
until  an  equilibrium  was  established. 

If  now  we  take  the  case  of  many  commodities  instead  of 
two,  the  explanation  still  holds.  This  theory  or  explana- 
tion, then,  may  be  summed  up  as  follows :    Valves  in  inter'- 


INTERNATIONAL   TRADE  277 

national  trade  will  he  such  as  to  equate  reciprocal  international 
demand,  and  equate  the  general  level  of  prices  in  the  trading 
countries.  This  theory,  clearly  developed  by  John  Stuart 
Mill,  is  known  as  the  theory  of  the  equation  of  international 
demand. 

The  Advantages  of  International  Trade.  —  We  have 
already  explained  that  international  trade  does  not  offer 
to  any  nation  the  possibility  of  "  getting  rich  "  by  heaping 
up  "  treasure  "  secured  from  a  so-called  favorable  balance 
of  trade.  The  real  advantage  in  international  trade  is 
that  (1)  it  enables  every  country  to  enjoy  goods  wKich  it  does 
not  itself  produee;  and  (2)  enables  each  country  to  secure  a 
maximum  of  satisfaction  and  an  economy  of  its  efforts  and 
resources  by  devoting  its  resources  and  energies  to  the  forms  of 
produxition  in  which  it  enjoys  the  greatest  relative  advantage, 
or  in  which  at  worst  it  suffers  the  least  relative  disadvantage. 

II.  Restrictions  on  International  Trade:    Protec- 
tionism 

Objects  of  the  Restriction.  —  Nations  have  always  laid 
restrictions  upon  international  commerce,  and  an  examina- 
tion of  the  history  of  such  restrictions  discloses  at  least 
four  motives  for  imposing  them.  (1)  In  the  first  place, 
we  may  note  that  ancient  nations,  the  Greeks,  the  Hebrews, 
and  others,  dreaded  contact  with  foreigners,  and  attempted  by 
restrictions  on  international  trade  to  reduce  such  contact 
to  a  minimum.  (2)  A  second  very  common  cause  of  re- 
striction has  been  the  desire  to  make  international  trade  a 
source  of  revenue.  Sometimes  a  tax  has  been  laid  upon 
both  exports  and  imports.  England  taxes  imports  with  a 
sole  view  to  securing  the  greatest  possible  revenue.  (3)  In 
the  third  place,  tariffs  have  at  times  been  laid  with  the 


278     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

idea  of  securing  a  supply  of  the  precious  metals^  through  a 
so-called  "  favorable  balance  of  trade."  No  enlightened 
nation  now  pursues  this  course.  (4)  Finally,  many  nations 
to-day  regulate  international  commerce  with  the  object  of 
securing  revenue,  and  at  the  same  time  weakening  foreign 
competition,  in  order  that  home  producers  may  be  encouraged 
and  supported.  Restriction  for  this  purpose  takes  the  form 
of  laying  duties  upon  imported  commodities  of  a  kind  that 
can  be  produced  in  the  home  country.  Such  taxes  are 
called  protective.  Collectively  they  form  what  is  called  a 
protective  tariff.  Home  producers,  it  is  said,  are  thus 
"  protected  "  against  foreign  competitors.  Of  course  in 
some  cases  it  is  possible  that  more  than  one  or  even  all  of 
the  objects  of  regulation  that  have  been  mentioned  may  be 
sought  by  the  country  which  thus  regulates  its  commerce 
with  other  nations. 

The  general  subject  of  protection  is  so  vast  that  a  com- 
plete discussion  of  it  would  fill  volumes.  We  must  be 
content  here  to  study  briefly  the  chief  points  in  controversy 
between  advocates  and  opponents  of  the  system,  to  give 
attention  to  certain  general  considerations  of  importance, 
and  to  suggest  what  desirable  changes  may  be  made  in  the 
American  tariff  system  upon  which  all  should  unite. 

Argument  of  Protectionists.  —  Protectionists  argue  that 
the  system  which  they  favor  promotes  nationalism,  or  a 
strong  sense  of  national  unity.  Domestic  trade,  they  say, 
should  be  encouraged  because  it  draws  the  citizens  of  a 
country  together,  while  international  trade  is  cosmopolitan 
and  tends  rather  to  the  separation  of  citizens  one  from 
another.  It  is  argued  that  nationality  and  a  strong  national 
feeling  depend  upon  a  sense  of  national  strength  and  in- 
dependence, which  can  exist  only  when  the  nation  has 
widely  diversified  industrial  interests,  and  therefore  pro- 


INTERNATIONAL    TRADE  279 

tective  duties  should  be  levied  to  encourage  such  a  diversifica- 
tion of  industry.  American  protectionists  insist  that  in  a 
new  country  there  exist  many  great  natural  advantages  of 
which  the  inhabitants  cannot  avail  themselves  unless  they 
are  protected,  at  least  temporarily,  from  the  competition 
of  foreign  producers,  who  have  the  advantage  of  long  ex- 
perience. The  (1)  diversified-national  industry  argument  and 
the  (2)  protection^to^nfant-industries  argument  —  the  ones 
upon  which  protectionists  most  strongly  insist  —  are  thus 
seen  to  be  supplementary.  Protectionists  urge  that  the 
older  nations,  by  reason  of  their  acquired  skill  and  capital, 
can  destroy  in  their  infancy  any  new  pursuits  that  a  younger 
rival  is  seeking  to  establish.  Closely  connected  with  this 
argument  is  another  based  on  (3)  military  grounds.  In- 
dustrial self-sufficiency  is  a  great  aid  to  a  nation  in  times 
of  war,  because  such  a  condition  lessens  the  distress  due  to 
possible  military  disasters.  Hence  it  is  claimed  that  nations 
at  peace  should  prepare  for  war  by  protecting,  nursing,  and 
fostering  the  widest  possible  range  of  domestic  industries. 
The  force  of  this  contention  was  admitted  by  Adam  Smith, 
who  is  frequently  called  the  Father  of  Political  Economy  and 
who  has  probably  done  more  for  free  trade  than  any  other 
man,  and  it  was  emphasized  by  George  Washington.  In  our 
own  time,  the  great  European  War  has  given  new  significance 
to  this  argument  and  has  shown,  as  many  think,  that  adequate 
industrial  self-sufficiency  has  a  far  wider  scope  than  people 
heretofore  were  willing  to  admit.  (4)  The  home  market  is  also 
claimed  to  be  superior  because  more  secure,  —  less  liable  to 
the  shock  of  war  or  international  complications.  (5)  Special 
advantages  are  said  by  the  protectionists  to  be  conferred  by 
their  system  upon  farmers,  who  are  saved  the  expense  of  long 
shipment  when  they  have  a  sufficient  market  for  their  crops 
among  home  manufacturers.    It  has  even  been  maintained 


280      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

by  one  American  protectionist  (6)  that  no  nation  can  be 
permanently  prosperous  unless  the  elements  taken  from  the 
soil  are  returned  to  it  in  the  form  of  manure  and  other 
fertilizers,  and  that  this  process  of  repair  is  possible  only 
when  agricultural  products  are  consumed  at  home.  Another 
common  protectionist  argument,  which  has  been  much  used 
since  the  labor  movement  first  became  prominent,  is  (7)  that 
the  protective  tariff  has  been  the  cau^e  of  high  wages  paid  to 
American  labor,  and  that  it  will  be  necessary  to  maintain 
the  protective  tariff  if  we  would  maintain  the  high  wages. 

Differences  in  the  economic  situation  of  other  countries 
lead  in  them  to  certain  protectionist  arguments  that  differ 
from  those  in  the  United  States.  For  example,  in  Germany 
it  is  urged  that  under  free  trade  in  grains,  the  German  pop- 
ulation will  increase  beyond  safety  so  long  as  the  rich  new 
lands  of  Canada,  Argentina,  and  other  parts  of  the  world  are 
being  wastefully  exploited  in  "  robber "  agriculture.  At 
length,  the  argument  runs,  these  lands  will  have  to  give  up 
such  wasteful  methods,  and  the  price  of  foodstuffs  must  in- 
evitably rise.  Hence,  it  is  argued,  by  imposing  a  tax  on  im- 
ports of  foodstuffs,  a  greater  proportion  of  the  German 
people  will  be  induced  to  continue  careful  farming,  and  pop- 
ulation will  be  held  in  check.  Also  the  military  argmnent  is 
strongly  emphasized  in  Germany,  and  Germans  probably 
believe  generally  that  the  situation  in  which  the  European 
War  has  placed  them  amply  justifies  their  policy. 

In  England,  in  recent  years,  emphasis  has  attached  to  the 
argument  that  imperialism,  which  could  be  furthered  by 
tariff  concessions  granted  to  one  another  by  the  mother 
country  and  her  several  self-governing  colonies,  is  prevented 
by  the  English  free  trade  policy,  since  that  policy  gives  no 
room  for  tariff  concessions.  A  further  argument  frequently 
put  forward  in  England,  to  much  the  same  effect,  is  that 


INTERNATIONAL    TRADE  281 

with  a  system  of  protective  tariffs  England  would  be  able 
to  secure  trade  favors  from  other  nations  by  playing  her 
trade  restrictions  against  theirs.  And  in  England  also  the 
argument  from  military  grounds  has  greatly  strengthened 
the  protectionist  sentiment. 

The  Argument  against  Protectionism.  —  The  name  "  free 
trader  "  is  generally  applied  to  the  opponent  of  protection- 
ism, but  "  free  traders  "  in  the  strict  sense  of  the  term  are 
in  fact  hardly  to  be  found.  Practically  all  of  those  who 
are  called  by  the  name  are  really  advocates  of  a  policy 
which  is  properly  described  as  that  of  a  "  tariff  for  revenice 
only.''  And  many  even  of  this  group  would  be  willing  to 
see  the  tariff  schedules  so  chosen  and  framed  as  to  allow 
incidentally  a  certain  measure  of  protection. 

A  thoroughgoing  "  free  trader  "  would  have  no  tariffs 
on  imports.  His  argument  would  run  about  as  follows: 
Taxes  on  imports,  with  very  few  exceptions,  are  borne 
by  home  consumers.  Therefore,  in  the  last  analysis,  the 
people  of  any  nation  must  pay  their  own  expenses;  they 
cannot  shift  them  to  the  shoulders  of  foreigners.  Taxing 
imports  is  therefore  a  vicious  policy  because  it  leads  people 
to  think  that  others  are  paying  the  taxes.  Moreover,  taxes 
on  imports  are  indirect  taxes,  paid  by  the  importer,  but 
shifted  by  him  in  higher  prices  to  the  final  consumers. 
Indirect  taxes,  it  is  argued,  are  furtive,  dishonest,  undemo- 
cratic, inequitable,  bearing  with  relatively  greater  weight 
upon  the  poor.  Such  taxes  restrict  international  commerce 
and  stand  in  the  way  of  international  good-feeling,  friendship, 
and  peace.  If  the  burning  of  all  our  customs  houses  would 
prevent  a  single  war,  the  national  gain  would  be  incalculable. 

But,  as  we  have  said  before,  there  are  practically  no  free 
traders  to  be  found,  —  not  so  many  as  the  real  merit  of  their 
argument  would  lead  one  to  expect. 


282     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  argument  that  follows  is  not  that  of  the  "  free- 
trader." It  is  rather  the  argument  for  a  *'  tariff  for  revenue 
only."  Perhaps,  better  yet,  it  might  be  called  the  argu- 
ment against  protectionism. 

In  opposition  to  protection  it  is  frequently  alleged  (1)  that 
protective  tariffs  are  a  violation  of  the  ''  natural  right "  of 
every  man  to  buy  and  sell  wherever  he  will,  untrammeled 
by  human  laws.  We  may  dismiss  this  "  natural  right  " 
argument  at  once  as  a  "  dogmatism  in  disguise."  It  is  a 
question-begging  argument,  since,  in  the  use  of  the  word 
"  natural,"  it  assumes  the  very  thing  that  must  be  proved 
before  the  argument  can  have  weight.  All  history,  and  the 
opinions  of  all  great  modern  thinkers,  are  against  such  an 
assumption.  It  would  be  well  if  this  argument  were  heard 
less  often. 

Again,  (2)  it  has  been  claimed  that  protective  tariffs  in 
the  United  States  are  unconstitutional.  But  this  argument 
is  idle  and  futile.  The  opinions  of  our  best  jurists  have 
always  maintained  the  constitutionality  of  our  tariff  legis- 
lation, and  there  is  not  the  slightest  chance  that  the  Supreme 
Court  will  ever  pronounce  a  protective  tariff  unconstitu- 
tional. 

The  really  cogent  arguments  of  the  advocates  of  a 
tariff  for  revenue  only  are  those  which  aim  to  show  that,  on 
the  one  hand,  the  protectionist  policy  fails  to  accomplish 
the  end  sought ;  and  that,  on  the  other  hand,  it  actually 
does  work  positive  injury  to  national  interests. 

In  the  first  place,  (3)  they  claim  that  protection  is  not 
necessary  to  the  development  of  national  feeling.  In  proof  of 
their  claim,  they  point  to  the  fact  that  the  last  half  century, 
which  has  witnessed  an  unprecedented  spread  of  inter- 
national trade,  has  also  witnessed  a  wonderful  growth  of 
national  sentiment  throughout  the  world. 


INTERNATIONAL    TRADE  283 

Opponents  of  pi-otection  claim  also  (4)  that  protective 
tariffs  are  not  necessary  to  produce  diversity  of  industry  in 
the  case  of  a  country  like  ours.  It  may  be  admitted  that^ 
a  purely  agricultural  nation  is  not  likely  to  progress  rapidly ; 
but  it  is  not  easy  to  understand  how  a  country  so  vast  as 
ours,  of  so  varied  a  climate,  of  boundless  natural  resources, 
could  be  anything  but  a  country  of  diversified  industry,  if 
industry  itself  is  left  unhampered  by  burdensome  restric- 
tions and  regulations. 

The  General  Influence  of  Protective  Tariffs.  —  But  the 
fundamental,  inclusive,  and  by  all  means  strongest  Economic 
argument  against  protection  is  as  follows :  (5)  whenever  a 
new  industry  is  started  in  any  country  as  a  result  of  a  pro- 
tective tariff,  it  is  started  by  withdrawing  or  withholding  the 
necessary  capital  and  labor  from  some  other  industry  which 
is  by  nature  more  profitable,  and  therefore  every  such  new 
industry  really  means  a  decrease  in  the  possible  produx^tiveness 
and  wealth  of  the  country. 

This  general  argument  in  its  affirmative  form  may  be 
stated  as  follows  :  with  nations  as  with  individuals  each  party 
to  trade  will  regularly  secure  the  greatest  advantage  if  the  trade 
is  left  unrestricted,  since  then  and  only  then  will  the  Tuition's 
labor  and  capital  enter  into  those  employments  that  are  naturally 
most  productive. 

It  would  seem  in  general  that  this  statement  must  be  true. 
If  any  proposed  new  industry  has  natural  advantages  that 
indicate  the  real  economy  of  starting  it,  then  there  can  be 
no  reason  for  protecting  it  by  a  tariff  wall  against  foreign 
competition.  Hence  the  claim  that  the  industry  needs  ^ 
protection  is  itself  an  admission  that  it  is  an  uneconomical 
industry.  And  if  it  is  fundamentally  uneconomic,  because 
the  labor  and  capital  applied  to  it  will  produce  less  than  they 
are  now  producing,  then  no  tariff  can  make  it  economic. 


284     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Of  course,  this  does  not  mean  that  those  who  invest  in  the 
protected  industry  cannot  make  profits.  We  could  prob- 
ably force  the  production  of  bananas  in  Maine,  tea  in  Indiana, 
and  rubber  in  Oregon,  if  we  prohibited  importation  of  those 
goods,  and  offered  to  possible  home  producers  a  sufficiently 
high  price.  And  the  Maine  banana  grower  might  conceiv- 
ably be  paid  so  much  that  he  would  make  big  profits.  But 
his  profits  would  clearly  be  at  the  cost  of  his  fellows.  The 
nation's  capital  and  labor  as  a  whole  would  be  made  less 
productive.  The  growing  of  such  products  would  be  against 
public  economy. 

By  way  of  qualification,  most  economists  admit  that  such 
new  industries  may  attract  to  the  country  some  foreign 
capital  which  would  otherwise  be  invested  elsewhere.  They 
also  admit  that  new  industries  are  sometimes  prevented, 
not  by  lack  of  natural  advantages,  but  because  they  cannot 
at  once  acquire  the  specialized  skill  and  capital  which  the 
foreign  competitor  enjoys  by  reason  of  his  longer  establish- 
ment ;  and  that  if  such  "  infant  industries  "  rapidly  reach 
a  condition  of  self-supporting  independence,  the  nation  may 
be  repaid  for  the  expense  incurred  in  hastening  the  estab- 
lishment of  such  industries.  But  they  justly  protest  against 
applying  the  name  "  infant  industries  "  to  businesses  that 
have  received  tariff  protection  from  the  country  for  nearly 
a  century.  Indeed,  (6)  the  fact  that  "  infant  industries  " 
have  thus  prolonged  the  period  of  their  infancy,  and,  in 
some  cases,  have  clamored  for  protection  even  when  they  are 
or  should  be  self-supporting,  furnishes  one  of  the  strongest 
arguments  against  a  policy  of  protection.  If  such  industries 
do  not  become  self-supporting,  they  continue  to  hold  prices 
up  beyond  a  reasonable  point ;  if  they  do  become  able  to 
withstand  competition,  but  still  have  protection,  they  may 
by  combining  maintain  a  higher  price  than  open  competition 


INTERNATIONAL    TRADE  285 

would  establish.  The  last  few  years  have  shown  beyond 
question  that  protection  favors  monopoly  by  shutting  off 
healthful  international  competition.  It  has  usually  been 
claimed  by  protectionists  that  the  competition  of  home 
producers  would  suflfice  to  keep  prices  down.  Now,  how- 
ever, we  are  confronted  by  the  obstinate  fact  that  in  the 
case  of  a  number  of  protected  industries,  combination  is 
taking  the  place  of  competition;  and  home  producers 
compete  at  low  prices  in  foreign  markets,  while  charging 
their  countrymen  such  higher  prices  as  protection  enables 
them  to  exact. 

Does  Protection  protect  Labor?  —  It  is  further  main- 
tained (7)  that  the  argument  of  the  protectionists  that  a 
protective  policy  benefits  the  laborer  will  not  bear  close  analysis. 
For  nearly  two  centuries  before  any  protective  tariff  existed 
in  what  is  now  the  United  States,  the  high  wages  of  American 
workingmen  had  been  repeatedly  noted  and  explained. 
Land  could  be  had  for  the  asking,  and  men  would  not  con- 
sent to  work  for  hire  unless  they  could  receive  a  wage  high 
enough  to  tempt  them  away  from  independent  peasant 
proprietorship.  The  same  condition  has  existed  during  the 
last  century,  and  almost  down  to  the  present  day.  The 
whole  question  of  the  connection  between  the  tariff  and 
wages  involves  a  discussion  of  many  complex  economic 
problems.  It  must  be  sufficient  here  to  suggest  a  single 
important  consideration  bearing  upon  this  question.  Labor 
competes  directly,  not  with  commodities,  but  with  labor.  The 
worker  himself  wants  commodities,  and  the  more  of  them  he 
can  secure  for  his  labor,  the  better.  In  other  words,  it  is 
not  high  money  wages  alone  but  high  wages  in  connection 
with  low  prices  that  indicates  national  welfare  and  pros-  ^ 
perity.  If,  then,  labor  is  to  be  protected,  a  tax  should  be 
put  on  the  importation  of  labor  rather  than  upon  the  prod- 


286     ELEMENTARY  PRINCIPLES  0F>  ECONOMICS 

uct  of  labor.  Otherwise,  the  workman  may  find  his  wages 
'  lowered  by  the  competition  of  a  multitude  of  imported 
workers,  while  he  finds  the  cost  of  living  unduly  raised  by 
the  protection  which  has  been  granted  to  the  domestic 
entrepreneur. 

The  Political  Argument.  —  Our  statement  of  the  argument 
would  be  incomplete  if  it  did  not  find  a  place  for  what  many 
regard  as  the  strongest  indictment  against  protectionism. 
Opponents  of  that  system  hold  it  responsible  for  a  great 
part  of  the  corruption  alleged  against  government  in  the 
United  States.  According  to  this  view,  the  vested  interest 
in  established  protection  has  been  the  very  center  of  the 
forces  of  vested  interests  of  all  sorts  that  have  constantly 
beset  Washington  to  seek  new  and  valuable  privileges  and 
to  safeguard  those  already  conferred  upon  them.  Although 
this  may  be  an  exaggerated  statement  of  the  evil,  it  can 
hardly  be  doubted  that  (8)  protectionism  as  a  system  has 
done  miLch  to  increase  the  difficulty  of  securing  just  and  honest 
government. 

The  Fiscal  Argument.  —  Finally,  it  is  contended  against 
protectionism  that  (9)  a  tariff  for  revenue  only  is  to  be  pre- 
ferred on  purely  fiscal  or  financial  grounds.  In  support  of 
this  contention,  it  is  claimed  that  such  a  tariff,  in  contrast 
with  a  protective  tariff,  would  tax  fewer  commodities,  would 
be  simpler  to  comprehend  and  to  administer,  and  would  cost 
much  less  per  dollar  of  revenue  collected. 

General  Considerations.  —  Certain  general  considerations 
remain  to  be  suggested.  In  the  first  place,  the  importance 
of  this  whole  question  has  been  much  exaggerated.  England 
prospers  with  a  tariff  for  revenue  only,  the  United  States 
has  prospered  under  protection.  How  far  England's  pros- 
perity has  been  due  to  her  tariff  system,  how  far  the  pros- 
perity of  the  United  States  has  been  in  spite  of  protection, 


INTERNATIONAL    TRADE  2gl 

we  cannot  tell.  The  tarifT  system  is  one  of  very  great,  but 
not  of  vital,  importance.  Moreover,  the  domestic  trade  of 
the  United  States  is  vastly  greater  and  more  important 
than  her  foreign  trade.  Indeed,  the  domestic  trade  of  the 
Mississippi  valley  alone  is  far  greater  than  our  entire  foreign 
commerce.  Under  the  federal  constitution,  all  trade  among 
the  states  is  free  trade.  Evidently,  then,  we  can  thrive 
as  we  have  thriven  under  protection,  »ince  by  far  the  greater 
part  of  our  trade  is  already  free  trade. 

In  the  second  place,  statistics  regarding  national  pros- 
perity, as  they  are  usually  presented,  throw  Httle  light  upon 
the  question  one  way  or  the  other.  The  tariff  policy  of 
modern  countries  has  undoubtedly  been  a  minor  factor  in 
their  industrial  life.  Inventions  and  discoveries,  the  spread 
of  general  and  technical  education,  the  hopeful  ambition  of 
all  classes  of  our  people,  the  growth  of  intelligence,  have 
been  chief  among  the  forces  that  have  made  such  astounding 
additions  to  the  wealth  of  the  world  during  the  past  century. 

In  the  third  place,  the  American  tariff  system,  bad  as  it 
undoubtedly  is  in  many  respects,  is  a  historical  growth  that 
has  taken  deep  root.  It  conditions  directly  or  indirectly  a 
great  part  of  our  industrial  life,  and  it  cannot  therefore  be 
suddenly  eradicated  with  impunity.  Yet  it  is  impossible 
to  tolerate  permanently  a  bad  condition  of  things,  and  we 
are  justified  in  demanding  that  there  shall  be  progress  in 
our  tariff  poHcy.  Even  selfish  considerations  are  likely  to 
lead  to  a  further  demand  for  lowering  our  tariff  schedules, 
now  that  other  powerful  nations  are  retaliating  or  threaten- 
ing to  retaliate  for  our  unneighborly  tariff  treatment  of  them. 

Finally,  for  the  reasons  above  indicated  and  for  many 
others,  it  seems  in  the  highest  degree  desirable  that  tariff 
changes  in  future  should  be  less  the  football  of  partisan 
pohtics  and  more  the  subject  of  intelligent  expert  study. 


288     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

It  is  of  course  impossible,  as  it  is  undesirable,  that  in  a 
democracy  so  great  a  question  as  that  of  the  tariff  should 
be  removed  from  politics ;  but  the  politics  should  be  clean 
politics  that  would  accord  a  large  place  to  expert  opinion 
and  advice.  In  other  words,  all  future  tariff  legislation 
should  be  initiated  by  an  expert  tariff  commission,  —  pref- 
erably permanent,  —  which  should  carry  on  its  investiga- 
tions under  conditions  of  the  fullest  publicity  and  keep  the 
public  regularly  informed  of  changing  conditions  on  which 
changes  in  tariffs  should  be  based.  The  people  of  the  United 
States  seem  now  to  have  reached  general  agreement  regarding 
this  matter,  and  such  a  Tariff  Commission  as  is  here  advo- 
cated has  already  (in  1916)  been  established  by  Congress. 

SUMMARY 

1.   International  trade,  in  its  elements  a  trade  among  individuals 
for  money,  is  in  final  effect  a  trade  among  countries  of  serv- 
ices for  services. 
'2.   The  balance  of  trade  is  the  chief  element  in  determining  the 
rate  of  exchange. 

3.  International  trade  is  peculiar  in  that  labor  and  capital  do  not 
flow  from  country  to  country  so  readily  as  from  section  to 
section  of  the  same  country. 

4.  International  trade  depends  not  on  differences  in  absolute  cost 

but  on  differences  in  comparative  costs. 

5.  International  values  are  determined  by  the  equation  of  re- 

ciprocal demand. 

6.  General  prices  and  the  national  money  supply  are  regulated 

by  trade  conditions. 

7.  Regulation   of   international   commerce,    for   widely   varying 

reasons,  has  been  common  among  nations. 

8.  Protection  is  defended  as  promoting  nationalism,  diversifica- 

tion of  industry  and  industrial  independence,  saving  costs 
of  transportation,  keeping  up  the  soil,  and  maintaining 
high  wages. 

9.  It  is  attacked  as  being  unnecessary  to  the  development  of 

industry,  as  opposed  to  "natural  rights,"  and  as  being 
unconstitutional.  It  is  further  claimed  that  a  protective 
tariff  regularly  diverts  labor  and  capital  from  industries 


INTERNATIONAL    TRADE  289 

that  are  more  productive  by  nature  to  industries  in  which 
the  employment  of  labor  and  capital  is  naturally  less  pro- 
ductive. 

10.  Protection  often  fosters  and  protects  monopolies,  and  is  a 

source  of  political  corruption.  Fiscal  considerations  strongly 
favor  a  revenue  tariff  system. 

11.  Our  tariff  system,  as  a  historical  growth,  must  be  modified 

conservatively  and  carefully. 

QUESTIONS  FOR  RECITATION 

1.  What  are  the  advantages  of  international  trade? 

2.  How  is  the  rate  of  exchange  determined?     What  is  meant 

by  "par  of  exchange"?     What  are  the  "gold  poiats"? 

3.  What  relation  has  international  trade  to  the  distribution  of 

money  among  nations?  To  general  prices  in  different 
countries  ? 

4.  What  goods  does  a  nation  export?     What  is  the  doctrine  of 

comparative  cost? 

5.  How  are  values  determined  in  international  trade? 

6.  What  is  protection?     Discuss  the  arguments  offered  in  its 

support.     In  opposition. 

7.  What  is  the  argument  of  the  thoroughgoing  free  trader? 

8.  Why  have  American  wages  always  been  high?     What  bearing 

has  this  on  the  protection  argument? 

9.  What  is  the  poUtical  argument  against  protection?  The  fiscal 

argument  ? 
10.   What  objections  are  there  to  a  sudden  change  in  the  tariff 
system  ? 

QUESTIONS   FOR   STUDY  AND  DISCUSSION 

1.  What  is  exchange  parity  between  New  York  and  Paris?    New 

York  and  Berlin?     New  York  and  Hoboken,  N.J.? 

2.  If  one  of  two  exchanging  nations  has  a  depreciated  currency, 

what  bearing  has  this  on  the  rate  of  exchange  ? 

3.  What  was  the  effect  of  the  European  war  on  the  rate  of  exchange  ? 

4.  Is  labor  mobile  within  the  United  States?  between  the  United 

States  and  Canada?  between  the  United  States  and  Turkey? 

5.  What  is  meant  by  "timidity  of  capital"? 

6.  Would  it  be  economically  desirable  to-day  to  grow  tea  in  the 

United  States?  With  a  prohibitive  tariff  on  tea,  might  it 
be  "profitable"  to  grow  tea  here?  If  tea  were  grown  here 
behind  the  protecting  wall  of  a  tariff,  with  profit  to  the 


290      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

growers,  would  that  be  a  sufficient  argument  against  abolish- 
ing the  tariff? 

LITERATURE 

In  favor  of  protection :  — 
Carey,  H.  C. :   Manual  of  Social  Science. 
List,  F. :   National  System  of  Political  Economy,  Introduction,  and 

Bk.  II,  Ch.  XVI. 
Patten,  S. :  Economic  Basis  of  Protection. 

Thompson,  R.  E. :   Protection  to  Home  Industry ^  and  Social  Science 
and  National  Economy. 

Against  protectionism :  — 
Bastiat,  F. :  Sophisms  of  Protection. 
Perry,  A.  L. :   Principles  of  Political  Economy,  Ch.  VI. 
Sumner,  W.  G. :   Protectionism. 

Taussig,  F.  W. :   Principles  of  Political  Economy,  and  Some  Aspects 
of  the  Tariff  Question. 

Nearly  all  standard  economic  treatises  on  Economics  arrive  at 
a  conclusion  generally  opposed  to  protectionism.  '  In  England  and 
Germany  some  economists  of  repute  have  favored  a  protective 
policy  for  their  own  countries.  A  large  body  of  literature  on  the 
question  has  been  produced  in  those  countries  within  recent  years, 


PART  IV.    DISTRIBUTION 

CHAPTER  I 
INTRODUCTORY 

The  Meaning  of  the  Word  "  Distribution."  —  Having 
studied  first  the  human  wants  that  lead  to  economic  activity, 
and  the  satisfactions  that  result  from  consumption ;  having 
studied  in  the  second  place  the  production  of  goods  and 
services  for  the  satisfaction  of  human  wants ;  and  having  in 
the  third  place  studied  the  subject  of  transfers  of  goods  and 
services,  and  especially  of  their  exchange  among  producers 
or  between  producers  and  consumers,  we  come  now  to  a 
study  of  the  distribution  of  the  income  of  society,  especially 
among  the  factors  that  have  united  in  its  production.  Under 
the  heading  Distribution  we  might,  and  to  some  slight  ex- 
tent shall,  consider  the  division  of  the  social  income  among 
individuals ;  but  that  part  of  the  entire  subject  of  distribu- 
tion is  so  vast  and  so  complex  that  we  cannot  in  such  a  book 
as  this  attempt  a  complete  treatment  of  it. 

There  is  one  sense  in  which  the  word  "  distribution  "  is 
not  used  here.  We  shall  not  use  the  word  in  the  sense  of 
moving  goods  from  the  place  where  they  are  produced  to 
the  place  where  they  are  consumed.  When  we  speak  of 
railways  or  retail  stores  as  "  distributive  agencies,"  we  are 
using  the  word  in  a  sense  wholly  different  from  that  of  the 

291 


)2     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

technical  term  which  describes  one  of  the  four  main  divisions 
of  economic  analysis. 

Before  passing  on  to  study  the  determination  of  the  great 
shares  of  the  annual  product  of  industry,  it  will  be  well  for 
us  to  pause  for  a  moment  to  consider  certain  general  ideas 
that  underlie  all  the  special  topics  that  are  to  follow. 
^  Social  Wealth  and  Social  Income.  —  All  the  economic 
goods  that  society  has  for  use  at  any  time  constitute  the  social 
wealth.  The  satisfactions  that  flow  from  the  social  wealth 
and  services  during  any  period  of  tiine  constitute  the  social 
income  for  that  period.  Social  wealth  is,  therefore,  a  fund 
or  reservoir  from  which  issue  one  of  the  great  streams  of 
social  income,  the  other  proceeding  from  services.  The 
body  of  social  wealth  in  any  two  nations  may  be  of  the 
same  volume,  while  the  stream  of  social  satisfactions  may 
be  of  very  different  volume  in  the  two  cases;  for  the  size 
of  the  social  income  depends  not  alone  upon  the  size  of  the 
social  wealth,  but  also  upon  the  completeness  with  which 
that  social  wealth  is  utilized  and  upon  the  services  rendered. 
Well-being,  moreover,  is  increased  by  the  satisfactions 
flowing  from  the  use  of  free  goods,  and  is  not  dependeijt 
merely  on  income. 

Private  Income.  —  The  social  income  is  of  course  shared 
among  the  members  of  society.  That  part  of  the  social 
income  which  the  individuxd  enjoys  is  his  real  private  income. 
The  money  which  an  individual  receives  during  any  period  of 
time  constitutes  his  money  income  or  nominal  income.  It  is 
important  to  keep  this  distinction  in  mind,  since  equality 
of  money  incomes  may  coexist  with  great  inequality  of  real 
incomes,  and  vice  versa.  Thus  it  is  a  commonplace  to-day 
that  city  workmen  regularly  receive  higher  money  wages 
than  the  same  classes  of  workmen  in  the  country ;  but  the 
differences  in  cost  of  living  would  go  far  to  make  the  real 


INTRODUCTORY  293 

incomes  of  the  two  classes  equal.  Again,  a  house  occupied 
by  its  owner  yields  a  real  income  to  him,  though  this  does 
not  enter  into  his  money  income  at  all. 

Private  Property.  —  Private  incomes  depend  upon  the 
institution  of  private  property.  Every  change  in  the  laws 
of  property  is  bound  to  change  to  some  extent  the  produc- 
tion and  exchange  of  goods,  and  hence  the  amount  of  the 
social  income,  but  to  a  still  greater  extent  and  more  im- 
mediately every  such  change  reacts  upon  the  distribution 
of  the  social  income  among  those  who  share  it.  The  im- 
portance of  our  property  laws  is  therefore  evident.  These 
laws  have  sometimes  been  of  such  a  character  that  they  have 
wrought  injustice  to  great  classes  of  people,  e.g.  the  laws 
making  human  beings  private  property. 

The  Shares  and  Share  Receivers.  —  As  we  have  said, 
the  distribution  on  which  attention  will  be  centered  in  the 
following  pages  is  the  distribution  of  the  product  of  industry 
among  the  great  factors  that  have  united  to  create  it.  The 
factors  considered  in  the  study  of  production  were  land, 
labor,  and  capital;  and  in  that  order  we  shall  consider 
the  distribution  of  the  product  among  them.  The  shares 
of  these  three  factors  are  known  as  rent,  wages,  and  interest. 
But  the  entrepreneur — he  who  secures  and  directs  the  organ- 
ization of  the  factors  —  is  also  an  important  share  receiver  in 
modern  industry,  and  hence  we  shall  study  the  principles 
governing  his  share  of  the  product,  called  profits.  Some 
writers,  in  view  of  the  great  part  played  in  all  production  by 
the  State,  treat  separately  the  share  received  by  the  State. 
All  that  for  our  purposes  needs  to  be  said  regarding  the  State's 
share  in  the  product  of  industry  will  be  presented  in  the  final 
chapters  of  the  book,  under  the  head  of  Public  Finance. 

Relation  of  Individuals  to  the  Four  Shares.  —  And  now 
just  a  word  as  to  the  relation  which  share  distribution  bears 


294     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

to  distribution  among  individuals.  Individuals  regularly 
receive  their  incomes  by  virtue  of  their  proprietary  relation 
to  one  or  more  of  the  factors  of  production.  Thus,  when  we 
are  discussing  the  share  of  the  annual  produce  that  goes 
to  land,  we  are  at  the  same  time  explaining  the  principles 
which  determine  the  size  of  the  rent  income  of  the  farmer 
himself.  Similarly,  an  inquiry  into  the  shares  received  by 
capital,  labor,  and  entrepreneurship  brings  us  more  or  less 
closely  to  the  question  of  the  income  of  the  individual 
capitalist,  laborer,  or  entrepreneur.  But  it  is  the  share  of 
the  factor  as  a  factor  that  we  shall  study  primarily,  noting 
only  incidentally  the  results  of  the  distribution  upon  the 
income  of  individuals.  The  importance  of  this  distinction 
appears  when  we  reflect  that  a  justifixiation  of  the  share  of 
industry  that  goes  to  land  or  capital  is  not  a  justification  of  the 
landlord's  or  the  capitalisfs  income,  unless  the  possession  of 
the  land  or  capital  is  also  justified. 

Explanation  not  Justification.  —  What  has  just  been 
written  suggests  a  further  caution,  which  cannot  be  too 
strongly  emphasized.  This  book  is  devoted  mainly  to  an 
attempt  to  analyze  existing  economic  arrangements,  and  to 
explain  how  economic  forces  operate  in  the  industrial  world, 
as  it  is  to-day,  and  based  as  it  is  on  certain  great  social  and 
legal  institutions,  such  as  private  property,  contract,  etc. 

Now  the  mind  has  a  vicious  habit  of  confusing  explanation 
with  justification.  Having  explained,  too  easily  we  allow 
ourselves  to  think  that  we  have  thereby  justified.  But  ex- 
planation and  justification  are  really  quite  different  and 
distinct  things.  Thus,  in  the  chapters  to  follow,  we  must 
never  lose  sight  of  the  fact  that  we  are  merely  explaining  or 
trying  to  explain  rent,  interest,  wages,  and  profits.  Their 
justification  or  condemnation,  while  it  should  properly  be 
based  on  a  correct  explanation,  must  also  be  based  on  a 


INTRODUCTORY  295 

multitude  of  economic,  ethical,  political,  and  other  con- 
siderations. In  this  book  we  can  afford  hardly  more  than 
a  bare  reference  to  some  of  the  most  important  of  such 
considerations. 

SUMMARY 

1.  Distribution  is  that  part  of  economics  which  deals  with  the 

division  of  the  social  income,  especially  among  those  repre- 
senting the  different  factors  of  production. 

2.  Our  modem  system  of  distribution  depends  directly  upon  our 

institution  of  private  property.  It  is  therefore  along  the 
lines  of  changes  in  private  property  that  improvement  of 
distribution  is,  in  part,  likely  to  come. 

3.  Private  income  is  the  individual's  share  of  the  social  income. 

Real  income  consists  of  commodities  and  services  which  the 
individual  has  for  his  consumption.  Money  income  is  the 
money  received  by  an  individual  during  any  period  of  time. 

4.  Explanation  of  income  shares  is  not  justification  of  income 

shares. 

QUESTIONS  FOR  RECITATION 

1.  What  is  distribution?     What  problems  does  it  seek  to  solve? 

2.  What  is  the  relation  of  private  property  to  distribution  ?     How 

is  this  illustrated  in  the  case  of  land  ?     In  the  case  of  capital  ? 

3.  If  a  physician's  practice  is  worth  $10,000  a  year,  what  is  his 

money  income?  Mention  some  of  the  things  that  probably 
go  to  make  up  his  real  income. 

4.  What  other  persons  are  Hkely  to  enjoy  a  part  of  this  income? 

5.  Distinguish  between  explanation  and  justification  of  the  actual 

distribution. 

QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  Analyze  the  total  annual  product  of  industry  to  show  the  net 

social  income  for  consumption. 

2.  Is  all  the  net  social  income  distributed? 

3.  How    do    children    receive    their    income?     Paupers-?     Semi- 

paupers?    Prisoners?    Professional  thieves? 

LITERATURE 

Ely,  R.  T. ;   Property  and  Contract  in  their  Relation  to  the  Distribu' 

Hon  of  Wealth,  2  vols.,  especially  Vol.  I,  Pt.   I,  Chs.   I-III. 
Mill.  J.  S.  :   PolUical  Economy,  Bk.  II,  Ch.  II,  §§  1,  2,  and  3. 


CHAPTER  II 
RENT 

As  in  the  study  of  the  factors  or  agents  of  production  we 
first  discussed  the  factor  land,  so  here  in  our  study  of  the 
distribution  of  the  social  income  among  the  factors  that 
contribute  to  its  production,  we  may  logically  begin  with  a 
discussion  of  the  return  to  the  first  factor. 

Meaning  of  the  Term.  —  As  used  by  economists,  the 
word  "  rent  "  means  that  which  is  paid  for  the  use  of  land 
or  other  natural  agents.  The  popular  meaning  of  the  word 
"  rent  "  is  less  exact.  In  everyday  life  we  hear  people  use 
the  word  to  describe  that  which  is  paid  for  the  use  of  a  house 
or  other  building.  But  such  so-called  rent  contains  two 
elements,  one  of  which  is  not  economic  rent  at  all.  The 
amount  paid  for  the  use  of  a  house  includes  the  amoimt  paid 
for  the  use  of  the  land  upon  which  the  house  stands,  which 
is  economic  rent;  but  it  also  includes  payment  for  the 
investment  of  capital  in  the  form  of  a  building,  and  this 
latter  return  is  therefore  not  rent,  but  interest.  The  reason 
for  the  popular  confusion  lies  in  the  fact  that  both  are  usually 
paid  to  the  same  person.  In  some  cities,  however,  separate 
ownership  of  lot  and  building  is  not  uncommon.  One  man 
may  own  the  building  site  and  lease  it  for  a  long  term  of  years 
to  another  man  who  erects  a  building  upon  it.  In  such  a  case 
the  building  becomes  the  property  of  the  landowner  at  the 
expiration  of  the  lease,  unless  the  lease  is  renewed.  In  other 
cases  the  separation  in  ownership  is  permanent,  l;he  houae- 
owner  paying  an  annual  sum  to  the  landowner  far  the  use 

296 


RENT  297 

of  the  ground.  This  is  the  ease,  for  example,  in  Baltimore, 
where  ground  rents  are  an  important  feature  in  the  economic 
life  of  the  city,  and  also  in  some  northern  cities  of  England, 
and  in  Scotland,  where  "feus,"  a  form  of  perpetual  ground 
rent,  are  a  familiar  institution.  Let  us  remember,  then,  that 
in  economic  discussions,  the  word  "  rent "  means  only  that 
which  is  paid  for  the  icse  of  land  or  other  natural  agents.  Inas- 
much as  land  is  the  chief  natural  agent  appropriated  by  man 
to  his  uses,  it  is  common  to  speak  of  land  as  if  it  were  the  only 
natural  agent  for  which  rent  is  paid.  It  is  therefore  neces- 
sary to  caution  the  student  at  this  point  that  when  the  word 
"  land  "  is  used  in  the  following  pages,  it  will  almost  always 
be  possible  to  substitute  for  it  the  more  general  term.  In 
other  words,  the  same  forces  which  determine  the  rent  of 
land  determine  in  the  main  the  rent  of  other  natural  agents. 
1.  The  Quality  of  the  Land.  —  The  first  thing  to  be  noted 
about  land  is  its  qimlity.  Differences  of  fertility  of  agri- 
cultural land  are  known  to  every  observer.  They  depend 
upon  what  one  of  the  early  economists  described  as  the 
"  natural  and  indestructible  properties  of  the  soil."  In 
recent  years  many  writers  have  objected  to  this  statement. 
It  has  been  said  in  denial  that  soil  is  not  "  indestructible  " ; 
that  it  may  be  and  often  is  exhausted;  that  it  can  be  re- 
moved from  the  land  altogether,  and  that  on  the  other  hand 
it  can  be  created  by  fertilization,  etc.  The  disagreement 
which  these  writers  express  is  due  in  large  part  to  their  use 
of  the  word  "  soil  "  in  its  narrow  sense.  If  we  use  the 
word  "  soil  "  only  to  distinguish  the  thin  top  layer  of  the 
land  that  contains  certain  chemical  elements  necessary  to 
plant  life,  then  some  of  the  objections  just  stated  are  valid 
ones.  Such  "  soil,"  as  distinguished  from  subsoil  and  the 
ground  lying  underneath,  may  indeed  be  carted  on  or  off  the 
land  at  pleasure  and  may  be  wasted  or  replenished.    But 


298      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

even  granting  this,  there  still  remain  certain  qualities  of  the 
land  that  are  practically  or  entirely  indestructible  and  un- 
producible,  and  which  affect  the  productiveness  of  the  land 
so  directly  that  we  may  without  impropriety  speak  of  them 
as  "  properties  of  the  soil."  Such  a  property  is  the  con- 
formation of  the  land.  A  steep  gravelly  hillside  does  not 
equal  a  plain  in  fertility,  nor  is  the  north  side  of  a  mountain 
as  productive  as  the  south  side,  other  things  being  equal. 
Again,  climate,  although  strictly  speaking  not  a  "  property 
of  the  soil,"  is  an  inseparable  condition  of  the  land,  upon 
which  to  a  very  great  degree  the  productiveness  of  the  land 
depends.  It  would  be  better  to  speak  of  these  forces  govern- 
ing the  quality  of  the  land  as  the  inseparable  conditions  affect^ 
ing  its  productiveness.  Of  these,  extent  (standing  room), 
conformation,  and  climate  are  essentially  natural  and  in- 
destructible. 

As  we  have  just  seen,  under  the  "  original  and  indestruc- 
tible qualities  of  the  soil,"  or,  to  use  the  phrase  suggested, 
the  inseparable  conditions  affecting  production,  we  must 
include  the  general  physical  environment,  and  this  means 
much  more  than  many  modern  critics  have  recognized. 
Concrete  instances  will  aid  us  in  appreciating  the  significance 
of  this  environment.  In  the  western  part  of  New  York 
State,  along  the  shores  of  Lake  Erie,  we  find  a  region  which  is 
admirably  adapted  to  the  production  of  table  grapes.  This 
is  due  in  part  to  the  properties  of  the  soil  itself,  but  more 
particularly  is  it  due  to  the  presence  of  Lake  Erie,  which,  by 
absorbing  the  heat  in  the  springtime,  delays  the  appearance 
of  vegetation,  and  by  giving  off  heat  in  the  fall  retards  the 
action  of  the  frost,  thus  giving  the  grapes  time  to  ripen. 
If  we  go  to  Palisade  in  the  western  part  of  Colorado,  we 
find  a  region  so  admirably  adapted  to  the  production  of 
peaches  that  some  of  the  land  was  several  years  ago  valued 


RENT  299 

at  $1000  per  acre.  This  is  due,  not  merely  to  the  properties 
of  the  soil,  but  also  to  the  peculiar  location  of  the  region, 
which  is  of  such  a  character  that  the  breezes  keep  off  the 
frost.  Land  thirty  miles  to  the  west,  which  is  apparently 
similar  in  quality,  will  not  produce  peaches  and  is  far  less 
valuable.  Careful  consideration  of  actual  agricultural  con- 
ditions leads  to  the  conclusion  that,  while  man  can  do  much 
to  create  fertility,  it  is  a  serious  error  not  to  attach  great 
significance  to  the  inseparable  conditions  affecting  the  pro- 
ductivity of  the  soil.  Parallels  to  the  American  examples 
quoted  could  be  found  in  different  districts  of  England 
specially  suited  for  the  raising  of  particular  crops  or  plants, 
or  noted  for  the  rearing  of  certain  breeds  of  sheep  or  cattle ; 
and  on  any  single  farm  the  farmer  will  tell  you  that  some  land 
is  good  and  that  other  land  is  bad,  whatever  may  be  done  to 
deteriorate  the  one  or  to  improve  the  other  by  niggardly  or 
unskillful,  or  by  generous  and  careful,  cultivation,  or  by 
withholding  or  applying  appropriate  fertilizers. 

While  it  is  true  that  the  soil  can  be  removed  and  that  fer- 
tility can  be  increased  or  diminished,  and  consequently  is  not 
indestructible  in  a  physical  sense,  we  may  speak  even  of  fer- 
tility as  economically  perpetual,  just  as  one  modern  econ- 
omist has  called  "  capital  value  "  perpetual.  While  the  land 
yields  an  annual  return,  its  fertility  may  be  maintained  and 
even  increased  by  wise  husbandry.  It  is  only,  then,  by  a 
wasteful  and  prodigal  agriculture  that  the  original  gifts  of 
nature  in  the  fertility  of  the  soil  are  exhausted.  Similarly 
the  value  of  the  capital  invested  in  a  manufacturing  plant  is 
maintained  under  wise  management,  though  the  concrete 
capital  forms  are  undergoing  constant  destruction.  But, 
as  it  is  easier  to  retain  the  fertility  of  the  soil  in  perpetuity 
and  to  increase  it  than  it  is  to  maintain  and  increase  the 
value  of  capital,  land  has  in  this  particular  a  superiority. 


300     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Fertility,  even  when  artificial,  becomes  essentially  a  part 
of  the  land.  The  farmer,  when  he  invests  his  capital  in  fer- 
tilizers, makes  a  contribution  which  becomes  indistinguish- 
able from  the  soil  itself.  From  such  a  case,  where  capital  is 
embodied  in  the  land  and  assimilated  to  it,  we  pass  by  in- 
sensible gradations  to  fences,  barns,  houses,  etc.,  which  more 
and  more  retain  their  distinct  character  as  capital  that  can 
be  removed  and  can  also  be  reproduced.  Where,  then,  is  the 
line  between  land  and  capital  to  be  drawn?  We  might,  to 
be  sure,  restrict  the  term  ''  land  "  to  strictly  natural  land,  and 
apply  the  term  "  capital  "  to  all  prodmts,  including  even 
the  soils  of  old  lands  which  have  been  kept  productive  by 
fertilization.  But  this  distinction,  while  perhaps  logical, 
would  for  practical  purposes  be  confusing.  On  the  other 
hand,  if  we  include  under  land  all  capital  that  has  been  in- 
sensibly incorporated  in  it,  we  must  acknowledge  that  there 
is  no  hard  and  fast  line  of  division  between  land  and  capital. 
Here  again  we  are  reminded  that  in  economics,  as  in  daily 
life,  distinctions  are  governed  by  convenience,  and  are  good 
or  bad  according  as  they  are  more  or  less  useful. 

The  distinctions  between  land  and  capital  are  now  under- 
going discussion  and  may  be  regarded  as  debatable  ground  in 
economics.  We  cannot  enter  into  the  controversy  in  this 
place  or  give  all  the  reasons  why  it  seems  to  us  that  the  dif- 
ferences between  land  and  capital  are  fundamental  in  their 
theoretical  and  practical  significance. 

2.  The  Situation  of  the  Land.  —  The  second  great  fact 
to  be  noted  about  land  is  its  situation.  On  one  side  this  is 
closely  connected  with  climate.  Thus,  the  significance  of 
situation  near  a  large  body  of  water  or  near  a  mountain  range 
has  already  been  pointed  out.  But  the  situation  of  land  with 
regard  to  the  consumers  of  products  is  of  even  greater  signif- 
icance.   Other  things  equal,  land  a  hundred  miles  from  mar- 


RENT  301 

ket  is  more  valuable  than  land  a  thousand  miles  from  market. 
This  difference  is  really  one  of  communication  and  trans- 
portation, and  therefore,  of  accessibility,  which  depends 
mainly  upon  distance.  But  land  may  be  far  away,  yet  easy 
to  reach,  or  near,  yet  difficult  of  access.  Changes  in  the  cost 
of  transportation  therefore  affect  rents  profoundly.  Thus, 
the  agricultural  rents  of  England  were  revolutionized  during 
the  last  centm-y  by  cheap  ocean  transportation,  by  which 
distant  lands  were  brought  very  near  to  her  shores. 

To  this  fact  of  situation  we  must  ascribe  almost  wholly 
the  enormous  rents  paid  for  city  lots,  as  contrasted  with  the 
rents  paid  for  lots  in  suburban  places  or  in  small  towns. 
Here,  too,  rapid  and  easy  transport  powerfully  affects  rents. 
Good  means  of  rapid  transit  increase  the  value  of  suburban 
lots  and  check  the  rise  of  rents  for  residential  sites  in  the 
cities  themselves. 

And  now,  having  noticed  that  all  the  minor  economic 
differences  in  land  resolve  themselves  into  differences  of 
quality  or  of  situation,  we  may  go  one  step  farther  and  reduce 
these  two  differences,  for  the  purpose  of  convenience,  to  one, 
viz.,  desirability.  Suppose,  for  instance,  that  a  man  in 
New  York  City  owns  two  farms,  one  in  the  state  of  Dakota, 
the  other  in  his  own  state.  If  the  Dakota  farm  produces 
thirty  bushels  of  wheat  to  the  acre,  and  it  costs  the  price 
of  ten  bushels  per  acre  to  get  the  crop  to  market,  while  the 
New  York  farm  raises  twenty-two  bushels  per  acre  and  it 
costs  two  bushels  per  acre  to  get  the  crop  to  market,  the 
farms  are  equally  productive  as  far  as  the  owner  is  con- 
cerned. Other  conditions  being  the  same,  the  two  pieces  of 
land  are  equally  desirable.  In  short,  we  may  say  that  they 
are  equally  good  land.  Whenever  we  speak  of  good  land, 
therefore,  in  connection  with  the  subject  of  rent,  we  mean 
land  which  for  all  reasons  taken  together  is  desirable.     It 


302     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

will  be  absolutely  necessary  to  keep  this  in  mind  in  studying 
the  following  pages. 

Rent  of  Agricultural  Land 

To-day  there  exist  large  areas  of  land  in  certain  parts  of 
the  world  which  may  be  had  for  nothing.  Of  this  land  some 
is  cultivated  and  yet  pays  no  rent ;  and  some  is  not  cultivated 
at  all.  Why,  then,  is  it  that  some  land  will  bear  rent  under 
such  circumstances?  Obviously,  because  that  land  is  more 
desirable  than  the  land  which  may  be  had  for  nothing.  Let 
us  illustrate  this  by  a  diagram. 


A 

d 

6'^ 
0 

e* 

D 

E 

0f 

S 

F 

ft 

g *-- 

Al ^ 

-^. 

1 

Suppose  the  above  to  represent  all  land,  arranged  in  seven 
groups  according  to  quality,  each  small  parallelogram  ^rep- 
resenting 2  dollars'  worth  of  product  based  on  its  value 
at  the  farm.  Then  the  first  group  will  produce  14  dollars* 
worth  of  product  as  the  result  of  a  given  outlay  of  labor  and 
capital;  the  second,  12;  the  others,  10,  8,  6,  4,  and  2,  re- 
spectively. Now,  if  the  people  are  few  in  number  and  need 
a  small  part  of  the  land  alone,  they  may  cultivate  only  A,  or 
the  most  desirable  land.  As  long  as  there  is  enough  of  this 
land,  if  it  is  of  equal  desirability,  there  will  be  no  rent,  for 
no  man  will  pay  rent  for  what  he  can  obtain  for  nothing. 


RENT  303 

But  the  time  may  come,  with  increasing  population,  when 
more  land  is  needed,  and  cultivation  is  driven  down  to  B. 
Land  is  still  free  there,  but  all  the  land  of  group  A  has  now 
been  appropriated.  If,  then,  any  man  insists  upon  cultivat- 
ing land  which  belongs  to  an  owner  in  group  A,  he  must  pay 
for  the  privilege.  How  much  must  he  pay  ?  Ricardo  would 
say  2  dollars  for  the  amount  of  land  used  to  produce  the  14 
dollars'  worth  of  products,  and,  assuming,  as  Ricardo  did, 
the  cultivators  to  be  of  equal  degree  of  efficiency,  the  rent 
would  be  2  dollars,  since  in  group  A  they  can  produce  14 
dollars'  worth  of  product  with  a  given  outlay  of  labor  and 
capital,  while  in  group  B  they  can  produce  only  12  dollars* 
worth.     The  land  in  B.  which  is  free  land,  is  now  situated 


on  what  may  be  called  the  extensive  margin  of  cultivation ;  _ 
that  is,  the  grade  of  land  which  will  just  pay  jor  cultivation  " 
and  no~^ore.    The  normal  reward  of  labor  and  capital  in  '^^ 
agriculture  is  the  total  return  to  farming  on  this  margin. 
The  surplus  product  from  the  superior  land  —  in  other  words, 
the  advantage  which  owners  of  land  in  A  have  over  the  tillers 
of  the  free  land  —  is  rent.    And  it  is  rent  whether  the  owners 
of  the  land  in  A  work  the  land  themselves  or  lease  it  out  to 
others. 

If  population  increases  still  further,  without  any  improve- 
ments in  the  arts  of  production  or  of  consumption,  the  margin 
of  cultivation  will  in  time  descend  to  land  in  group  C,  where 
the  value  produced  by  a  given  amount  of  labor  and  capital 
is  less  than  that  produced  before.  Land  in  B  will  now 
return  a  rent  of  2  dollars,  while  land  in  group  A  will  yield  a 
rent  of  4  dollars.  If  the  margin  of  cultivation  is  forced  down 
later  to  E,  then  rents  on^and  in  B  will  equal  one-half,  and  on 
land  in  A  will  equal  four-sevenths,  of  the  entire  product  of 
such  land. 

Intensive  Cultivation.  —  We  have  now  considered  rent 


304      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

from  the  point  of  view  of  the  extensive  margin  of  cultiva- 
tion. This  is  the  traditional  treatment  of  the  subject  of 
rent  which  has  been  most  emphasized  by  economists  in  the 
past.  They  have,  however,  not  neglected  to  treat  rent  from 
the  point  of  view  of  the  intensive  margin,  which  we  shall  now 
consider. 

With  the  figure  in  mind,  let  us  place  ourselves  again  at  the 
point  where  all  the  A  land  is  taken  up  and  the  men  are  begin- 
ning to  seek  new  means  of  production.  We  have  assumed 
that  they  will  take  up  new  land  in  group  B.  This  is  not  the 
only  possibility,  however.  It  is  probable  that  land  in  A  may 
be  made  to  produce  more  than  it  has  yielded  before,  if  the 
amount  of  labor  and  capital  expended  upon  it  is  increased. 
In  other  words,  it  will  be  possible  to  cultivate  the  old  land 
more  intensively  at  a  profit.  Suppose  that  ten  men  formerly 
cultivated  100  acres  of  A  land,  raising  1400  dollars*  worth 
of  product,  and  that  now  eleven  men  put  their  labor  upon 
the  100  acres.  It  may  be  that  the  100  acres  will  now  produce 
1530  dollars,  in  which  case  it  is  evident  that  the  labor  of 
the  eleventh  man  has  made  a  difference  of  130  dollars.  The 
1400  dollars'  worth  of  product  raised  by  the  ten  men  meant 
140  dollars  per  man.  In  accordance  with  the  law  of  diminish- 
ing returns,  the  eleventh  man  does  not  increase  the  output 
proportionately,  but  he  is  still  producing  10  dollars  more  than 
he  would  if  he  were  to  work  on  the  B  land,  where  by  our 
assumption  ten  men  could  produce  only  1200  dollars'  worth 
of  products.  The  owner  will  give  such  a  laborer  only  what 
he  could  get  elsewhere,  on  the  B  land,  which  would  be  120 
dollars.  The  difference  between  the  120  dollars  and  the  130 
dollars  the  owner  of  the  superior  land  takes  for  himself. 
Encouraged  by  this,  the  owner  thinks  of  hiring  a  twelfth  man, 
but  concludes  that  he  would  thus  secure  a  crop  of  only  1640 
bushels.    Hence  the  twelfth  man  would  increase  the  output 


RENT  305    / 

by  only  110  dollars,  while  he  would  have  to  be  paid  120  dol- 
lars, the  amount  that  he  could  earn  by  working  free  land  in 
group  B.  All  new  laborers,  therefore,  in  excess  of  one  for 
every  ten  of  the  earlier  laborers,  would  find  it  more  profit- 
able to  put  their  labor  upon  the  free  land.  Hence,  as  the 
demand  for  agricultural  produce  increases  relatively  to  the 
supply,  new  labor  and  capital  are  expended  upon  land 
already  under  cultivation  as  well  as  upon  land  not  used  before. 
The  rent  of  such  land  is  increased  by  the  surplus  yielded 
by  every  addition  of  labor  and  capital.  In  other  words, 
there  is  a  change  in  both  the  intensive  and  extensive  margins 
of  cultivation.  With  every  increase  in  the  price  of  produce, 
and  with  every  fall  in  the  extensive  margin  of  cultivation, 
more  labor  may  be  employed  profitably  on  land  already 
cultivated.  Thus  the  landowner,  who  in  the  case  last  sup- 
posed could  not  afford  to  employ  a  twelfth  laborer,  may  be 
able  to  employ  thirteen  or  even  more  when  the  extensive 
margin  of  cultivation  has  fallen  to  group  C  or  D.  From  the 
foregoing  illustration  it  is  clear  that  the  theory  of  rent  is 
based  upon  that  law  of  diminishing  returns  which  has 
already  been  explained  in  a  previous  chapter.  It  is  evident 
that,  barring  improvements  in  the  arts  of  production  or  con- 
sumption, each  addition  to  the  number  of  mouths  which  must 
be  filled,  at  least  beyond  a  limited  number,  makes  the  task 
of  drawing  sustenance  from  the  earth  more  difficult.  But 
we  know  that  improvements  have  hitherto  kept  pace  with 
increasing  population,  or  have  outstripped  its  growth,  to  use 
the  more  correct  description. 

The  intensive  margin  is  reached  in  the  case  of  all  land  when     ? 
the  last  application  of  labor  and  capital  produces  no  surplus.    ' 
What  is  called  the  extensive  margin  means  land  which  just 
pays  for  cultivfttieft~^nd..yJelds  no  surplus  beyond  the  re- 
muneration  of  labor  and  capital.    When  we  treat  the  rent 


306     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

J         of  land  from  the  point  of  view  of  the  intensive  margin,  we 
have  one  uniform  method  which  appUes  to  all  land. 


Rent  of  Ubban  Land 

The  fact  that  situation  is  the  factor  of  special  importance 
in  determining  the  desirability  of  urban  land  leads  to  cer- 
tain results  of  a  peculiar  nature  that  call  for  separate  discus- 
sion. We  may  consider  first  of  all  land  used  for  residential 
purposes.  Cities  have  quarters  which  natural  beauty,  health- 
fulness,  convemence,  and  in  an  especial  measure  fashion 
have  rendered  particularly  desirable.  In  proportion  to  de- 
mand the  supply  is  sharply  limited,  and  this  circumstance 
causes  a  keen  competition.  The  height  to  which  this  com- 
petition will  carry  rents  will  depend  upon  the  number  pos- 
sessing large  amounts  of  wealth,  and  upon  their  readiness 
to  spend  their  money  on  what  they  regard  as  desirable  sites 
for  homes,  and  fashion  has  perhaps  in  towns  more  influence 
on  such  intensity  of  desire  than  any  other  force.  Similar 
considerations  will  affect  the  height  to  which  the  rent  of 
business  sites  will  rise.  The  higher  the  average  of  well- 
being  and  the  more  willing  people  are  to  spend  their  money, 
the  greater  will  be  such  rents.  Fashion  enters  here,  too, 
particularly  in  the  retail  trade.  If  people  spend  money 
readily,  they  will  pay  appreciably  more  for  an  article  in  a 
convenient  locality  than  for  the  same  commodity  in  a  situa- 
tion slightly  less  convenient.  This  will  often  enable  those 
whose  business  is  in  desirable  locations  to  secure  higher  prices 
with  a  larger  quantity  of  sales,  or  to  increase  still  further  the 
number  of  sales  by  keeping  to  the  price  asked  by  competitors 
situated  less  desirably.  Intensity  of  traffic  is  an  important 
consideration  in  determining  the  rent,  and  consequently  the 
value,  of  retail  business  property.    We  must  also  take  into 


RENT  307 

account  the  quality  of  the  people  who  are  responsible  for  this 
trafiBc,  the  rent  depending  both  on  numbers  and  on  quality. 
In  some  cases  a  high  degree  of  intensity  may  counterbalance 
a  lack  of  fashion,  or  even  more  than  counterbalance  it,  and 
retail  business  property  in  a  neighborhood  which  is  not 
fashionable  may,  in  consequence  of  the  intensity  of  traflSc, 
have  a  higher  rent  than  similar  property  in  a  fashionable 
locality  where  the  traffic  is  comparatively  small.  The 
influence  of  fashion,  however,  can  be  seen  in  a  very  marked 
manner  in  a  city  like  New  York,  where  large  numbers  of 
rich  people  would  on  no  account  make  purchases  in  an 
"  unfashionable "  street.  The  result  is  a  large  surplus 
gain  secured  by  business  sites  favorably  located.  Competi- 
tion transfers  to  the  landowners  that  surplus  due  to  situa- 
tion. This  explains  a  fact  which  has  puzzled  many  observers, 
namely,  the  high  rents  in  American  as  contrasted  with  Euro- 
pean cities.  American  cities  are  spacious,  but  other  con- 
siderations besides  space  govern  rents. 

Reflection  will  show  that  where  the  two  elements  of  a  high 
degree  of  scarcity  and  desirability  enter  into  the  location  of 
land  on  the  seacoast  or  in  inland  health  or  pleasure  resorts, 
similar  causes  v/ill  produce  large  rents.  On  the  other  hand, 
it  is  commonly  a  matter  of  little  or  no  concern  where  the 
potatoes  and  beef  we  eat  ate  produced,  and  the  result  is 
that  agricultural  rents  are  governed  less  noticeably  by  sit- 
uation, the  means  and  cost  of  transport  being  the  chief 
consideration  in  this  matter. 

The  Relation  of  Rent  to  Value  of  Product.  —  It  is  often 
said  that  rent  has  no  influence  on  the  value  of  the  product, 
and  that  rent  differs  herein  from  wages  and  interest,  which 
are  said  to  "  determine  "  price.  This  view  at  first  sight  seems 
to  be  paradoxical,  as  the  tenant  must  pay  rent  to  the  land- 
owner as  well  as  interest  to  the  capitalist  and  wages  to  his 


308     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

laborers.  The  paradox  is  explained  by  saying  that  prices 
are  fixed  by  the  expenses  of  production  on  the  poorest  land 
where  wages  and  interest  are  paid,  but  no  rent  is  possible, 
or  by  the  expenses  of  production  where  marginal  capital 
is  employed  on  the  better  grades  of  land.  Hence  the  rent 
that  is  paid  for  the  better  land  is  the  result,  and  not  a  caTIser 
of  the  price  fixed  ih^lhis^ay:  ~~      ^ 

This  doctrine  is  true  in  the  main,  but  it  has  its  limitations. 
To  the  extent  that  land  is  "  indestructible  "  and  does  not 
need  any  treatment  to  maintain  its  services  to  production,  it 
is  correct  to  say  that  rent  does  not  enter  into  price.  On 
the  other  hand,  to  the  extent  that  labor  and  capital  require 
a  remuneration  to  keep  them  from  perishing,  wages  and 
interest  do  clearly  enter  into  price.  But  so  far  as  regards 
the  payments  necessary  to  keep  up  the  fertility  of  the  land, 
and  so  far  as  regards  the  surplus  above  maintenance  which 
labor  and  capital  receive,  the  doctrine  is  not  true. 

The  Relation  of  Rent  to  the  Value  of  Land.  —  The  value  of 
land,  however,  is  determined  by  its  rent.  The  value  of  the 
product  determines  rent,  and  rent  in  turn  determines  the 
value  of  the  natural  agent.  If  any  piece  of  land  is  so  much 
more  desirable  than  the  poorest  piece  which  is  in  cultivation 
that  it  will  return  a  rent  of  five  dollars  per  year,  and  if  at  the 
same  time  and  place  capital  regularly  commands  5  per  cent 
interest,  then  the  owners  of  the  land  and  others  will  regard 
each  acre  as  equal  in  value  to  an  amount  of  capital  that 
returns  five  dollars  per  year,  or  one  hundred  dollars.  But 
anticipated  future  changes  in  the  yield  of  land  are  also 
reflected  in  the  prices  at  which  land  is  sold.  If  it  is  gen- 
erally expected  that  the  yield  of  land  will  increase,  its  sell- 
ing price  will  be  high  as  compared  with  its  present  income ; 
if  it  is  anticipated  that  the  income  of  a  particular  piece 
of  land  will  fall,  its  selling  price  will  be  relatively  low. 


RENT  309 

Hence  we  may  say  that  the  value  of  land  is   its  rent 
capitalized. 

Definitions  of  Rent.  —  We  are  now  prepared  to  define 
rent  more  exactly  and  completely  than  was  possible  before, 
and  to  see  that  different  definitions  which  may  be  given 
describe  it  in  reality  from  different  points  of  view.  Thus 
the  definition,  "  rent  is  that  which  is  paid  for  the  use  of  land 
or  other  natural  agents,"  conveys  no  idea  of  the  power  by 
which  it  is  secured  nor  of  the  way  in  which  its  amount  is 
determined.  In  order  that  land  of  a  given  grade  should  have  a 
rent  paid  for  it,  it  must  be  both  useful  and  scarce.  The  more 
useful  grades  of  land  are  scarce,  while  the  less  useful  grades 
are  in  excess  of  the  demand  for  land  and  are  no-rent  lands. 
According  to  Ricardo,  the  author  of  the  generally  accepted 
theory  of  rent,  tJie  amount  of  rent  is  determined  by  the  extent 
to  which  the  given  natural  agent  or  the  given  v^e  of  the  agent 
surpasses  in  productiveness  the  poorest  natural  agent  of  the 
same  sort  or  the  least  profitable  u^e  of  such  a  natural  agent  that 
society  requires  to  meet  its  demands  for  the  product.  In  all  this 
it  has  been  assumed  that  cultivators  possess  and  display 
equal  efficiency.  That  is,  that  a  given  piece  of  land  will 
yield  the  same  return  per  dollar's  wortE^oflabor  and  capital 
expended  upon  it,  no  matter  which  one  of  our  6,000,000 
farmers  operates  the  farm.  Differences  of  product  due  not 
to  differences  in  the  natural  agent,  but  to  differences  in  the 
ability  of  those  who  use  the  natural  agent,  make  it  difficult 
to  state  accurately  the  measure  of  rent  but  leave  unmodified 
the  general  statement  of  the  differential  character  of  rent  as 
presented  by  Ricardo. 

SUMMARY 

1.  Rdht  is  the  return  paid  for  the  use  of  a  natural  agent,  and  !s 
equal  to  that  part  of  the  product  of  the  natural  aeent  which 
is  in  excess  oi  the  product  of  the  poorest  agent  of  tiie  same 


310     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

sort  that  is  cultivated,  assuming  equal  applications  of  labor 
and  capital. 

2.  So  long  as  land  exists  in  excess  of  all  demand,  rent  is  determined 

by  the  excess  of  product  over  that  of  the  poorest  free  land, 
assuming  equal  applications  of  labor  and  capital. 

3.  When  all  land  is  taken  up,  and  all  is  cultivated  that  will  repay 

cost,  rent  is  determined  by  the  excess  of  product  over  the 
necessities  of  laborers,  —  as  determined  by  the  law  of  wages,  — 
and  the  necessary  reward  to  the  capital  invested  in  cultiva- 
tion. 

4.  Increased  demand  for  the  products  of  the  soil  regularly  results 

in  the  cultivation  of  more  land  (extensive  cultivation)  and  in 
the  application  of  more  labor  and  capital  to  that  already  in 
cultivation  (intensive  cultivation). 

5.  In  a  given  stage  of  the  arts  of  production  a  point  is  reached 

in  the  application  of  economic  energy  to  any  natural  agent, 
beyond  which  the  return  to  further  applications  of  energy 
is  proportionately  less  (the  Law  of  Diminishing  Returns). 

6.  Special  importance  attaches  to  situation  in  the  determination 

of  urban  rents. 

7.  The  value  of  any  natural  agent  tends  to  be  determined  by  its  rent 

capitalized  at  the  current  rate  of  interest  on  free  capital, 
but  falling  and  rising  land  values  modify  this  tendency. 

QUESTIONS  FOR  RECITATION 

1.  On  what  is  rent  based?     Why  would  rent  disappear  if  land 

were  unlimited  in  amount  and  all  were  of  equal  quality  ? 

2.  Discuss  the  differences  in  desirability  of  land. 

3.  How  is  the  amount  of  rent  determined  when  free  land  exists  ? 

4.  What  is  the  extensive  margin  of  cultivation?     The  intensive? 

What  is  intensive  cultivation?  What  considerations  deter- 
mine how  far  intensive  cultivation  may  profitably  be  carried  ? 
State  the  Law  of  Diminishing  Returns.  Show  how  it  applies 
to  land  used  for  manufacturing.  For  commercial  build- 
ings. For  city  residences. 
6.  What  effect  does  a  lowering  of  the  margin  of  cultivation  have 
upon  rent  ?     Why  ? 

6.  What  is  the  effect  of  improvements  in  the  arts  of  production? 

Of  consumption?  Of  transportation?  What  are  the  forces 
in  society  that  tend  to  raise  agricultural  rents?  Urban 
rents  ? 

7.  Does  rent  determine  price?     If  so,  why?     If  not,  why  not? 

8.  How  is  the  value  of  any  natural  agent  measured? 


RENT  311 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  Discuss  the  different  kinds  of  rents  paid  by  farm  tenants  with 

which  you  are  famiHar  and  compare  the  advantages  and  dis- 
advantages : 

(a)  to  the  land  owners ; 

(6)  to  the  tenants ; 

(c)  to  society  at  large. 

2.  Under  what  circumstances  is  tenancy  of  land  good,  under  what 

circumstances  evil  ?  If  generally  an  evil,  what  would  you  do 
about  it  ? 

3.  Supposing  you  are  married,  is  it  better  for  you  to  own  your  home 

or  to  pay  rent?  Would  home  ownership  be  preferable  for 
you,  even  if  more  costly  ? 

4.  Do  high  rents  raise  the  price  of  agricultural  products  T 

5.  Enumerate  the  advantages  of  private  ownership  of  land.     What 

are  the  disadvantages  ?  Is  it  possible  to  increase  the  present 
social  advantages  and  lessen  the  present  disadvantages  of 
landed  property,  while  still  retaining  it  ? 

LITERATURE 

Clark,  J.  B. :  Distribution  of  WealtfU^.  XIII,  pp.  188-193. 
Commons,  J.  R. :  The  DistribvM^^v'^-W'ealth,  Ch.  Ill,  pp.  159-170. 
George,  Henry  :  Progress  and  Poverty,  Bk.  Ill,  Ch.  II  (seven  pages). 
Hobson,  J.  A. :  The  Economics  of  Distribution,  Ch.  IV,  §§  1  and  2. 
King,  W.  I. :    The  Wealth  and  Income  of  the  People  of  the  United 

States,  Ch.  VII,  pp.  154-163. 
Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  II,  Ch.  XII,  §§  2 

and  3. 
Patten,  S.  N. :  Dynamic  Economics,  pp.  144-147. 
Taylor,  H.  C. :  "  The  Differential  Rent  of  Farm  Land,"  Quarterly 

Journal  of  Economics,  August,  1903. 
Walker,  F.  A. :  Land  and  its  Rent. 


CHAPTER  III 
WAGES  AND   THE  LABOR  PROBLEM 

I.  How  Wages  are  Determined 

We  have  pointed  out  that  of  the  factors  of  production, 
land  and  labor  are  the  primary  and  original  ones.  Having 
discussed  rent,  or  the  portion  of  the  product  allotted  to  the 
owners  of  land,  we  may  next  properly  consider  wages,  the 
portion  allotted  to  labor.  First  of  all,  it  is  to  be  noted  that 
in  the  study  of  wages  there  are  really  two  distinct  problems 
to  be  investigated.  What  share  of  the  total  produce  of  indus- 
try goes  to  labor?  This  is  the  problem  of  general  wages.  But 
having  answered  this  question,  we  shall  still  have  to  ask  our- 
selves why  some  classes  of  workmen  receive  greater  irecoTries  than 
others;  why  brick  laying,  for  instance,  is  paid  a  higher  rate  of 
wages  than  is  hod  carrying,  and  so  on.  This  second  problem 
is  called  the  problem  of  relative  wages.  We  shall  discuss 
the  two  problems  separately  as  we  have  here  stated  them. 

1.  General  Wages.  —  It  follows  from  our  discussion  of  the 
determination  of  value  that  if  we  imagine  a  purely  Jiypo- 
*(  thetical  and  practically  impossible  condition  where  wage- 
earherswere  in  excess  of  all  demand  forjbheir  labor,  such  labor 
f  [would  have_no  v^ue;  wages  wouldHbe  nothing]  DiTthe 
other  hand,  if  workers  were  few  and  in  great  demand,  only 
the  more  intense  wants  for  labor  could  be  satisfied,  and  wages, 
or  the  value  of  labor,  would  be  very  high.  It  is  evident, 
then,  that  wages,  the  value  of  labor,  depend  upon  the  rela- 

312 


WAGES  AND   THE  LABOR   PROBLEM  313 

tion  between  the  supply  of  labor  and  the  demand  for  it. 
But  this  statement  is  too  general  to  be  of  great  use.  We 
must  therefore  consider  further  the  forces  that  determine 
the  supply  and  the  demand. 

The  Number  of  Wage-earners.  —  We  have  already  dis- 
cussed the  tendency  of  the  human  race  to  multiply.  Beyond 
all  doubt  the  desire  for  marriage  and  family  is  one  of  the 
strongest  and  most  universal  of  human  desires.  But  over 
against  this  desire  stand  many  others,  —  desires  for  food, 
clothing,  and  a  multitude  of  other  things  which  are  of  course 
arranged  and  satisfied  in  order  of  their  economic  importance. 
No  man  intentionally  satisfies  weaker  desires  at  the  expense 
of  stronger  ones.  In  the  whole  list  of  desires,  that  for  mar- 
riage must  take  its  place  according  to  its  importance.  The 
rank  of  this  desire  varies  with  individuals  and  classes.  Some 
regard  education,  books,  art,  or  even  a  substantial  bank  ac- 
count as  more  important  than  marriage  in  their  scale  of  de- 
sires. The  amount  of  necessaries y  comforts,  and  luxuries  which 
anyjpersoff  or  class  is  accustomed  to  enjoy  and  to  insist  upon 
having,  is  the  "  standard  of  life,"  or  the  '^standard  of  comfort,'* 
of  that  person  or  class.  This  standard  of  life,  though  inca- 
pable of  precise  definition,  is  a  very  real  and  powerful  force  in 
the  determination  of  wages.  Whenever  wages  tend  to  fall 
below  the  point  at  which  the  workman  can  maintain  his 
standard  of  life  for  a  family,  many  workmen  will  do  without 
the  family,  and  will  attempt  to  maintain  the  standard  of  life 
for  themselves  alone.  Especially  since  women  have  become 
independent  wage-earners,  with  a  standard  based  on  their  own 
earning  power,  has  this  force  come  to  operate  upon  both  men 
and  women  to  prevent  or  postpone  marriage,  and  to  dimin- 
ish the  number  of  children  born.  The  higher  the  standard  of 
life,  the  greater  is  the  persistence  shown  in  maintaining  it. 
TrhT5se  whose  standard  is  very  low  are  often  heedless  or  hope- 


314     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

less  when  that  standard  is  threatened;  while  those  who 
have  attained  a  high  standard  display  marked  caution  in 
delaying  marriage  until  their  income  will  justify  such  a  course. 
It  is  plain,  then,  that  the  standard  of  life  constantly  limits  the 
number  of  wage-earners,  and  hence  tends  to  maintain  or  even 
to  increase  the  value  of  labor.  Notice,  however,  that  it  is 
not  here  claimed  that  the  standard  of  life  directly  affects 
wages.  Whether  or  how  far  the  standard  of  living  or  of 
comfort  can  influence  directly  the  wages  of  labor  is  quite  a 
different  question. 

The  Economy  of  High  Wages.  —  In  what  has  just  been 
said  we  have  simply  noted  the  influence  of  the  standard  of 
life  upon  the  number  of  workers  in  the  labor  market.  But 
the  result  is  equally  striking  when  we  come  to  consider  the 
influence  of  the  standard  upon  the  eflBciency  of  labor.  Even 
from  the  point  of  view  of  employers  as  a  class,  the  policy  of 
depressing  the  workers'  standard  of  life  stands^  condemned. 
Labor,  to  attain  its  highest  eflBciency,  must  have  character 
and  intelligence  as  well  as  mere  brawn.  More  and  more, 
business  men  are  coming  to  learn  the  "  economy  of  high 
wages,"  and  to  recognize  that  "  cheap  labor  is  dear  labor." 
American  labor  is  in  many  industries  the  cheapest  labor  in 
the  world  because  it  is  the  best  paid.  High  wages  make  pos- 
sible a  high  standard  of  Hfe.  The  high  standard  of  life  makes 
the  labor  intelligent,  hopeful,  and  full  of  character,  as  well 
as  more  eflBcient  physically.  And  the  increased  efficiency 
makes  possible  the  higher  wages.  Thus  by  action  and  re- 
action the  standard  of  life  is  both  a  cause  and  a  result  of  the 
wages  received. 

The  Demand  for  Labor.  —  In  what  has  gone  before,  we 
have  considered  especially  some  of  the  forces  that  operate 
to  control  the  supply  of  labor  in  the  labor  market.  In  other 
words,  we  have  been  considering  the  problem  of  wages  chiefly 


WA§Xg  AtB   THE  LABOR   PROBLEM  316 

from  the  point  of  view  of  supply  of  labor.  It  remains  for  us 
to  see  how  far  we  can  explain  wages  from  the  point  of  view 
of  demand.  Manifestly,  under  our  present  industrial  system, 
capital  will  not  be  saved  nor  businesses  conducted 
unless  those  who  save  the  capital  and  those  who  con- 
duct the  businesses  receive  a  reward  for  their  contribution 
to  production.  If  workmen  in  seeking  higher  wages  enforce 
demands  which  would  rob  the  capitalist  of  the  interest  that 
is  his  due,  or  the  entrepreneur  of  the  profits  that  secure  his 
services,  then  shortly  the  capital  will  cease  to  be  saved  and 
the  unprofitable  businesses  will  be  discontinued.  It  is  evi- 
dent, therefore,  that  the  demand  for  labor  has  an  upper  limit 
in  the  value  to  society  of  the  product  of  labor.  By  unjust 
laws,  by  inequitable  conditions,  the  employers  may  be  able 
to  seciu*e  labor  for  less  than  the  workman  contributes  to  the 
value  of  the  product,  but  it  is  not  easily  conceivable  that 
under  present  conditions  of  industry  the  labor  can  for  long  j^' ' 
get  more  than  it  actually  produces.  C 

■Summary  of  Theory  of  General  Wages.  — Summing  up     ^ 
now  what  has  been  explained  at  length,  we  may  say  that     u 
wages  depend  upon  the  relation  between  the  supply  of  labor  and   O 
the  demand  for  it.     The  supply  of  labor,  and  hence  the  lower 
limit  of  wages,  is  fixed  to  some  degree  by  the  standard  of  life 
of  the  workers.     But  as  this  force  operates  slowly,  it  may 
in  extreme  cases  happen  that  the  only  lower  limit  to  wages  is 
the  amount  which  will  enable  the  workers  to  live.    In  earlierr 
days  some  economists  seemed  to  think  that  wages  would/ ^ 
normally  and  in  the  long  run  rest  at  this  point  of  bare  subsist- 
ence, and  the  law  of  wages  which  they  formulated  has  there-j  ^  ^ 
fore  been  called,  BE  account  of  its  rigidity  and  its  harshness/       1 
the  "  iron  law  of  wages."     On  the  side  of  demand,  we  can  only  vW/' 
say  that  there  is  an  upper  limit,  fixed  by  the  value  of  the  worker* s       ^ 
contribution  to  the  product,  beyond  wki«li  wajes  canm^t  nor- 


316     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

mally  go,  since  the  demand  for  labor  cannot  be  measured  at 
a  higher  price  than  the  price  of  what  it  produces.  Conse- 
quently the  demand  for  labor  may  result  in  giving  to  the 
worker  in  wages  the  whole  of  the  product  of  industry  after 
deducting  rent  and  such  minimum  interest  and  profits  as 
are  fixed  by  laws  to  be  explained  later.  Between  the  lower 
limit,  set  by  the  standard  of  subsistence,  or  by  the  standard 
of  life,  and  the  upper  limit,  set  by  the  value  of  the  worker's 
contribution  to  produet,  wages  will  fluxiuxite  according  to  the 
relative  bargaining  strength  of  the  two  parties  to  the  wage 
contract. 

2.  Relative  Wages.  —  Coming  now  to  the  problem  of  rela- 
tive wages,  to  the  question  why  some  classes  of  w^ork  are 
paid  for  at  a  higher  rate  than  others,  it  is  evident  first  of  all 
that  the  pay  of  workmen  in  any  class  of  employment  depends 
upon  the  relation  between  the  demand  for  such  labor  and  the 
supply  of  such  labor,  and  upon  the  relative  bargaining 
strength  of  those  in  each  group.  Thus  far  the  considerations 
already  discussed  bear  upon  relative  wages  as  upon  general 
wages.  But  in  the  discussion  of  relative  wages,  there  are 
certain  special  considerations  to  be  borne  in  mind.  Differ- 
ences in  relative  wages  are  settled  in  the  great  majority  of 
cases  by  past  conditions.  To  understand  them  we  must 
go  back  to  a  man's  father  or  grandfather.  Occupations 
where  remuneration  is  high  are  usually  so  difficult  to  enter 
that  few  are  able  to  surmount  the  difficulties.  Thus 
peculiar  and  rare  qualities  may  be  required,  or  an  expen- 
sive training,  which  few  parents  are  at  once  able  and  willing 
to  give. 

The  poor  are  thus  caught  in  a  vicious  circle.  Their  poverty 
results  in  crowding  them  into  a  restricted  group  of  occupa- 
tions. Their  crowding  into  these  occupations  so  increases 
the  product  in  those  fields  that  the  product  has  a  low  value 


WAGES  AND   THE  LABOR   PROBLK  :\\1 

as  compared  with  the  product  of  industries  less  crowded. 
The  value  of  the  product  being  thus  reduced,  wages  are  also 
kept  down.  And  the  low  wages  are  in  turn  a  cause  of  the  lack 
of  preparation  of  the  following  generation  for  a  wide  choice  of 
employment.     Thus  poverty  breeds  poverty. 

While  the  various  sorts  of  labor  are  almost  infinite  in  num- 
ber, they  are  nevertheless  susceptible  of  a  fairly  distinct  clas- 
sification. These  classes  have  commonly  been  called  "  non- 
competing  groups."  Perhaps  the  best  naming  of  these  is  that 
made  by  Professor  Giddings  as  follows :  automatic  manual, 
responsible  manual,  automatic  mental,  responsible'  Tnental. 
Between  any  two  groups  very  little  competition  is  at  any 
given  time  possible.  What  competition  there  is,  is  almost  a 
matter  of  generations,  resulting  largely  from  the  action  of 
parents  in  preparing  their  children  for  entering  one  or  the 
other  of  the  groups. 

Can  society  do  anything  to  hasten  the  upward  movement  ? 
Obviously  it  is  against  the  selfish  class  interest  of  the  higher 
groups  to  make  easier  the  entrance  into  their  groups.  This, 
and  even  more  importantly,  ignorance  and  heedlessness, 
have  resulted  in  social  hostility  or  indifference  to  proposals 
for  improvement.  But  in  recent  years,  increased  sympathy 
and  knowledge  have  led  to  various  hopeful  movements  of 
reform,  such  as  improvements  in  the  educational  system,  vo- 
cational guidance,  and  the  like.  The  movement  is  likely  to 
go  much  further  as  the  various  social  and  economic  classes 
gain  in  knowledge,  imagination,  and  sympathy. 

The  Influence  of  Public  Schools.  — A  good  system  of 
public  education  continually  increases  the  amount  of  freedom 
in  the  choice  of  occupations.  Education  gives  greater  knowl- 
edge regarding  the  advantages  and  requirements  of  different 
occupations  at  the  same  time  that  it  puts  its  possessor  in  a 
position  where  he  can  more  readily  realize  the  one  and  meet 


318     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

the  other.  It  therefore  tends  to  lessen  the  competition  for 
the  lowest  grades  of  employment,  thus  raising  the  wages  there ; 
while  it  tends  to  lower  the  wages  in  the  higher  grades  by  mak- 
ing the  competition  for  such  employment  more  keen. 

It  is  of  course  easy  to  exaggerate  the  influence  of  more 
"  schooling  "  in  preparing  men  for  the  various  tasks  of  life. 
But,  after  all,  it  is  very  doubtful  whether  any  other  one 
agency  of  civilization  has  a  greater  influence  than  does  the 
school  in  fitting  the  young  of  all  classes  for  the  industrial 
struggle  that  lies  before  them.  This  being  so,  it  seems  likely 
that  society  will  move  rapidly  and  far  along  this  line  in  at- 
tempting to  lessen  such  inequalities  of  economic  situation 
among  classes  as  are  not  proved  to  be  due  to  differences  of 
inherited  natural  capacity.  What  results  might  not  be- 
achieved  to-day  if  society  were  to  provide  for  compulsory, 
free,  subsidized  education  of  body  and  mind  of  all  its  sons  and 
daughters  up  to  the  eighteenth  year  of  their  lives,  such  edu- 
cation being  limited  only  by  the  ability  of  instructors  and  stu- 
dents to  realize  its  possibilities  ! 

Adam  Smith  enumerated  the  following  five  causes  for  dif- 
ferences of  wages  in  different  employments :  first,  their  agree- 
ahleness  or  disagreeahleness ;  second,  the  ease  or  difficulty  of 
learning  them;  third,  the  regularity  of  employment;  fourth, 
the  need  of  trustworthiness  in  the  workman ;  fifth,  the  prob- 
ability  of  success.  This  summary  of  determining  conditions 
assumes  an  unreal  freedom  of  competition  among  workmen  to 
secure  the  greatest  net  advantage  from  their  employment. 
It  nevertheless  is  suggestive  and  helpful  in  explaining  actual 
differences  in  relative  wages.  It  will  be  a  good  exercise  for 
the  student  to  apply  to  existing  occupations  Adam  Smith's 
statement  of  the  causes  of  differences  of  wages. 


WAGES   AND   THE   LABOR   PROBLEM  319 

II.  Labor  Organizations 

Wages  have  been  shown  to  be  largely  dependent  upon  the 
relative  bargaining  strength  of  the  workers  as  compared 
with  that  of  entrepreneurs  and  others  who  contribute  to  the 
work  of  production.  The  same  thing  could  be  shown  to  be 
true  also  of  the  other  conditions  of  emplo>Tnent  which  enter 
into  the  wage  contract,  such  as  working  hours,  intensity  of 
work,  etc.  Such  being  the  case,  it  is  natural  that  under  our 
modern  wage  system  workmen  have  sought  to  increase  their 
bargaining  strength  by  every  means  in  their  power.  '  One  of 
the  most  evident  means  is  that  of  uniting  their  strength  in 
labor  organizations.  By  such  organization  labor  is  enabled 
to  substitute  "  collective  bargaining "  for  the  individual 
bargaining  under  which  the  workman  is  at  a  manifest  and 
great  disadvantage.  Labor  organizations ,  then,  are  more  or 
less  permanent  combinations  of  workmen  formed  to  increase 
their  power  of  determining  the  conditions  of  employment 

Labor  a  Unique  Commodity.  —  For  many  reasons  it  is  un- 
fortunate that  labor  must  be  regarded  as  a  commodity  at 
all.  Generalizing  is  at  once  one  of  the  greatest  economies 
and  one  of  the  greatest  dangers  of  the  human  mind.  We 
could  hardly  think  at  all  if  we  did  not  generalize ;  but  our 
thinking  often  has  very  vicious  practical  consequences  be- 
cause of  imperfect  generalization.  The  mental  process  by 
which  we  include  labor  among  commodities  is  a  notable  in- 
stance in  point.  Having  generalized  the  idea  of  commodities 
to  include  labor,  we  forget  the  peculiarities  of  labor  and  make 
it  the  victim  of  practical  conclusions  that  are  false  and  vicious 
for  that  commodity,  however  true  they  may  be  for  others. 

Labor  cannot  be  separated  from  the  body  and  spirit  of  the 
laborer.  Where  his  work  is,  there  must  he  be,  in  conditions 
and  circumstances  that  may  exalt  or  debase  him.    Again, 


320     ELEMENTARY    PRINCIPLES  OF  ECONOMICS 

labor  unsold  is  lost  forever.  It  cannot  be  held  for  a  favoring 
market.  Its  sale  is  always  a  forced  sale.  The  worker  en~ 
dures,  but  to-day's  work,  if  unsold,  cannot  be  sold  to-morrow. 
It  would  require  too  great  space  to  show  all  the  other  practical 
differences  that  mark  labor  off  from  other  commodities. 
The  two  that  have  been  explained  will  suffice  to  prove  that 
we  cannot  use  any  "  general  principle  "  of  "  equal  treatment  " 
to  justify  the  same  laws  for  labor  as  for  other  commodities. 
"  There  is  no  greater  inequality  than  the  equal  treatment  of 
unequals." 

Origin  of  Trade-unionism.  —  It  is  a  debated  question 
whether  any  trade-union  grew  directly  out  of  one  of  the  older 
gilds.  In  the  eighteenth  century,  unionism  seems  to  have 
started  with  the  building  and  the  tailoring  trades,  as  the 
employers  in  such  cases  were  small  contractors  against  whom 
it  was  comparatively  easy  to  combine.  In  the  nineteenth 
century  in  England,  the  trade-union  movement  spread  to  the 
factories  and  the  mines,  and  some  of  the  strongest  unions  are 
made  up  of  operatives  in  large  factories,  such  as  the  textile, 
mills ;  but  in  the  United  States  unionism  has  not  effectively 
spread  to  the  unskilled  and  semi-skilled  workers  in  factories. 
This  leaves  great  bodies  of  workmen  who  have  no  chance  to 
bargain  on  equal  terms  with  their  employers.  If  men  cannot 
look  forward  themselves  to  becoming  employers,  they  are 
bound  in  time  to  see  that  their  interest  lies  in  locking  arms, 
that  thereby  they  may  secure  the  strength  of  unity,  and  by 
collective  action  restore  some  approximation  to  the  old 
equality  in  skill  and  bargaining  power  that  marked  contracts 
between  master  and  man  in  the  simple  industry  of  earlier 
centuries.  Thus  the  organization  of  labor  becomes  socially 
and  economically  necessary  and  inevitable. 

But  we  must  not  exaggerate  the  advantage  of  the  em- 
ployer when  faced  with  a  conflict  with  his  employees.    The 


WAGES  AND    THE  LABOR   PROBLEM  321 

employer  has  often  important  contracts  to  fulfill  and  he  may 
lose  his  all  as  a  result  of  a  strike,  while  the  employees  lose  only 
wages  for  a  short  time.  The  extreme  on  this  side  is  given 
when  an  employer  is  trembling  on  the  verge  of  economic 
ruin,  wiping  out  the  savings  of  years ;  and  on  the  other  hand 
stands  a  thoughtless,  improvident  wage-earner  who  con- 
templates a  period  of  idleness  with  satisfaction. 

Three  Forms  of  Organization.  —  Labor  organizations  may 
be  divided  into  three  classes,  and  as  a  matter  of  fact  are  so 
divided  to-day  in  the  United  States  and  England.  The  trade- 
unions  in  the  United  States  now  aUied  in  the  American  Feder- 
ation of  Labor,  and  the  "old"  trade-unions  of  England,  are 
primarily  unions  of  skilled  artisans  of  distinct  crafts.  Ac- 
cording to  the  old  trade-union  idea,  each  craft  should  be 
organized  by  itself.  The  Knights  of  Labor  in  the  United 
States,  at  one  time  a  powerful  body,  is  an  example  of  the 
second  class.  They  aim  to  break  down  the  barriers  to  com- 
mon action  found  in  differences  of  occupation.  Within  re- 
cent years  in  all  industrial  nations  a  still  "  newer  "  unionism 
has  developed,  on  lines  of  industry  rather  than  of  craft  or  trade, 
of  which  the  United  Mine  Workers  and  the  Brewery  Workers 
of  America  and  the  new  industrial  unions  in  England  are 
notable  examples.  The  three  forms  are  usually  distin- 
guished by  the  names  trade-  or  craft-unionism,  labor-unionism, 
and  industrial-unionism.  In  the  United  States  the  latest 
phase  is  represented  especially  in  the  two  rival  organizations 
known  as  the  Chicago  and  the  Detroit  "  wings  "  of  The 
Industrial  Workers  of  the  World.  The  American  Federa- 
tion of  Labor,  moreover,  which  is  based  chiefly  on  craft-union- 
ism, also  includes  a  considerable  number  of  powerful  indus- 
trial unions. 

Growth  of  Labor  Organizations.  —  Estimates  as  to  the 
numerical  strength  of  labor  organizations  in  the  United  States 


322      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

vary  considerably.  The  number,  of  course,  varies  from  time 
to  time.  A  period  of  prosperity  for  the  organization  is  gen- 
erally followed  by  one  of  reaction.  Reaction  has  always 
ended  in  a  new  advance,  and  thus  far  in  the  United  States 
each  new  advance  has  carried  the  labor  organizations  farther 
forward  than  ever  before.  The  American  Federation  of 
Labor,  at  its  thirty-fourth  annual  convention  in  1915,  reported 
a  dues-paying  membership  of  1,946,347.  Secretary  Morrison 
of  the  Federation  reported  in  the  same  year  that  '*  unafliliated 
unions  recognized  by  the  Federation,"  including  various 
railway  "  Brotherhoods,"  had  a  membership  of  344,182. 
If  to  these  figures  be  added  those  of  the  probable  membership 
of  the  Knights  of  Labor,  Industrial  Workers,  and  other 
smaller  bodies,  the  total  number  of  members  of  labor  or- 
ganizations would  probably  rise  to  two  and  a  half  millions. 
Relative  numbers  of  unionists  are  as  great  for  other  great 
industrial  nations  as  for  our  own  country.  It  was  calculated 
in  1911  that  there  were  over  11,000,000  unionists  in  twenty 
nations  of  the  world. 

Strikes.  —  Strikes  are  essential  to  collective  bargaining, 
as  they  are  nothing  else  but  the  refusal  of  employees  to  agree 
to  the  terms  of  the  employers.  But,  like  the  lockouts  which 
are  used  by  the  employers,  they  produce  obvious  harm,  both 
strife  and  loss,  and  therefore  every  effort  should  be  made  to 
avoid  them,  if  the  result  can  be  secured  by  other  means.  It 
is  only  as  a  last  resort  that  they  can  be  justified,  or  are 
justified  by  the  unions  themselves.  Yet  the  power  of  such 
action  as  a  lever  of  advantage  is  not  to  be  despised. 
Observation  based  on  American  experience  goes  to  show  that 
more  than  one-half  of  all  strikes  are  wholly  or  partly  success- 
ful in  enforcing  the  demands  of  the  unions.  Out  of  a  total 
of  36,759  strikes  reported  to  the  United  States  Bureau  of 
Labor  from  1881  to  1905,  47.94  per  cent  were  wholly  success- 


WAGES   AND   THE  LABOR   PROBLEM  323 

ful;  15.28  per  cent  partly  successful;  and  36.78  per  cent 
failed.  Even  where  strikes  are  apparently  failures,  they  may 
accomplish  much  for  the  employees  by  inspiring  sufficient 
fear  of  recurrence  to  bring  about  fairer  treatment  from  un- 
willing and  unjust  employers. 

Strikes  are  most  likely  to  be  successful  when  they  are 
declared  during  a  period  of  improving  business ;  and  hence 
strikes  for  higher  wages  are  more  often  successful  than  those 
aimed  to  prevent  a  reduction.  Indeed,  it  has  been  claimed 
that  employers  have  in  some  cases  secretly  encouraged  a 
strike  when  they  have  desired  to  close  their  works  during  a 
period  of  slack  business,  in  order  to  drive  a  better  bargain 
with  the  men  when  the  strike  should  have  proved  unsuc- 
cessful. 

Boycotts  and  Injunctions.  —  Another  effective  weapon  in 
the  hands  of  organized  workmen  is  the  "  boycott,"  which 
means  a  concerted  refusal  of  workingmen  of  many  trades,  or 
even  many  localities,  to  purchase  commodities  produced  in 
a  shop  where  a  labor  dispute  is  in  progress.  The  refusal 
to  patronize  often  extends  to  business  enterprises  where  no 
labor  dispute  exists  at  the.  time,  but  which  buy  from  a  boy- 
cotted establishment ;  it  is  then  called  a  "  secondary  boy- 
cott." The  boycott  is  considered  to  be  a  more  efficient 
means  against  the  employer  than  even  the  strike.  Of  late, 
however,  American  trade-unions  have  used  it  less  frequently 
than  before  as  a  result  of  the  unfavorable  attitude  taken  by 
the  courts.  The  courts  in  America  are  a  greater  factor  in 
deciding  labor  disputes  than  in  any  other  country  that  has 
passed  into  the  modern  industrial  stage.  By  issuing  "  writ3_ 
of  injunction  "  they  often  prohibit  organized^workingmen 
uii^er  the  penalty  of  being  punished  for  contempt  of  court, 
from  performing  collectively^  acts_jn_^ursuit  of  ^^__bo^cott 
or  a  strike,  which,  if^3one  by  an  individual,  would  not  have 


324      ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

constituted  a  breach  of  the  law.  English  law  grants  much 
greater  power  to  organized  labor. 

Employers'  Associations.  —  One  of  the  results  of  the 
growth  of  labor  organizations  has  been  the  growth  of  em- 
ployers' associations.  Such  associations  have  generally 
arisen  for  the  purpose  of  counteracting  the  increased  bargain- 
ing power  which  the  workingmen  have  acquired  through  their 
organization.  Frequently,  however,  after  a  more  or  less 
lengthy  period  of  industrial  strife,  the  employers'  associa- 
tions and  the  trade-unions  have  succeeded  in  arriving  at 
agreements  concerning  wages,  hours,  and  other  working  con- 
ditions. Such  agreements,  which  are  known  as  trade  agree- 
merits  J  are  generally  valid  during  a  period  from  one  to  three 
years. 

The  Influence  of  the  Public.  —  A  powerful  influence  against 
violence  and  needless  strikes  is  the  recent  great  growth  in 
public  knowledge  and  public  interest  in  matters  that  concern 
labor.  Public  support  of  their  cause  is  now  an  object  of  fre- 
quent appeal  by  labor  organizations.  The  use  of  "  Union 
Labels,"  placed  upon  goods  made  by  union  labor  under  con- 
ditions satisfactory  to  the  organizations,  is  becoming  increas- 
ingly frequent  and  effective. 

The  National  Consumer's  League  represents  a  movement 
of  the  same  sort  from  without  the  ranks  of  labor.  This 
league,  organized  less  than  twenty  years  ago,  is  doing  a  quiet 
but  effective  work  by  granting  the  use  of  its  "  Consumers' 
League  Label  "  to  all  manufacturers  of  certain  classes  of  goods 
who  satisfy  the  league  that  they  are  fulfilling  prescribed  con- 
ditions in  the  employment  and  treatment  of  labor.  As  yet 
the  label  is  used  only  in  a  few  classes  of  women's  and  children's 
clothing,  but  it  is  the  intention  of  the  league  to  carry  its 
work  much  farther.  The  league  has  further  accomplished  a 
great   work   by   initiating   a   country-wide   movement   for 


WAGES   AND   THE  LABOR   PROBLEM  325 

"early  shopping,"  to  lessen  the  overburdening  of  retail 
clerks  in  holiday  seasons. 

The  growing  recognition  by  the  public  of  its  influence 
and  responsibility  in  the  matter  of  strikes  and  other  phases 
of  the  labor  problem  is  shown  by  the  work  of  the  United 
States  Industrial  Commission,  which  reported  to  Congress 
in  1900,  and  by  the  work  of  the  Federal  Industrial  Relations 
Commission  which  reported  in  1915  and  1916.  Moreover, 
among  various  proposals  for  social  action  to  lessen  or  pre- 
vent strikes,  the  one  that  meets  with  widest  acceptance  is 
that,  in  case  of  strikes,  the  public  should  be  furnished  with 
all  the  facts  on  both  sides  of  the  controversy. 

The  National  Civic  Federation,  an  association  of  citizens  of 
national  prominence,  with  subordinate  state  federations  in 
many  states,  has  done  much  to  organize  public  opinion  effec- 
tively for  fair  decisions  and  hence  for  influence  in  many  in- 
dustrial questions. 

Incidental  Benefits  of  Labor  Organizations.  —  1.  Promo- 
tion of  Temperance.  —  The  drinking  of  liquor  is  not  allowed 
at  union  meetings,  and  most  of  the  unions  advocate  tem- 
perance, although  the  majority  of  their  journals  stand  against 
prohibition.  The  Brotherhood  of  Railway  Engineers,  how- 
ever, and  some  of  the  unions  of  highly  skilled  workmen  are 
also  in  favor  of  prohibition. 

2.  Educational  Influence.  —  It  would  be  hard  to  overesti- 
mate the  importance  of  the  educational  feature  of  labor 
organizations.  The  debates  and  discussions  which  the 
imions  foster  stimulate  the  intellect  and  do  much  to  counter- 
act the  deadening  effect  of  a  widely  extended  division  of 
labor.  Moreover,  they  furnish  opportunities  for  social  cul- 
ture to  women  as  well  as  to  men,  and  thus  lessen  the  tempta- 
tion to  coarse  indulgence  and  develop  the  finer  side  of  their 
nature. 


326     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

3.  Elevation  of  the  Standard  of  Life.  —  It  is  often  ob- 
jected that  they  seek  by  imposing  hindrances  on  some  of  their 
members  to  raise  the  wages  of  the  rest.  What  they  are  really 
trying  to  do  is  to  raise  the  workman's  standard  of  life,  in  order 
that  progress  may  mean  for  them  not  merely  an  increase  in 
the  number  of  men  employed,  but  rather  a  betterment  of 
the  quality  of  human  life  concerned  in  the  occupation.  It  is 
objected  again  that  the  limitation  of  numbers  in  one  trade 
can  only  result  in  overcrowding  others,  and  that  therefore, 
if  all  trades  were  successfully  organized,  the  results  in  one 
part  of  the  labor  field  would  neutralize  the  results  else- 
where, and  nothing  would  be  gained.  But  such  an  objec- 
tion overlooks  the  significant  fact  that  the  union  may 
check  the  imprudence  that  leads  to  overpopulation,  and 
possibly  maintain  a  just  balance  between  the  need  of  society 
for  the  labor  and  the  need  of  the  laborer  for  a  complete 
human  life. 

4.  Many  of  the  trade-unions  perform  also  the  function  of  a 
benefit  society.  They  provide  relief  in  case  of  death,  acci- 
dent, sickness,  unemployment,  and  in  some  cases  even 
for  old  age.  As  a  cooperative  insurance  company  the  trade- 
union  is  able  to  attain  a  high  degree  of  efficiency,  as  the 
members,  being  bound  by  reciprocal  ties  of  solidarity,  for- 
bear to  practice  against  the  common  insurance  fund  those 
small  frauds  which  constitute  such  a  grave  problem  in  the 
administration  of  industrial  insurance  either  by  the  state  or 
by  a  private  company.  In  Great  Britain,  the  trade-union 
insurance  fund  forms  an  important  element  in  the  recently 
enacted  system  of  social  insurance. 

Weaknesses  of  Labor  Organizations.  —  Some  of  the  weak- 
nesses of  labor  organizations  have  already  been  touched  upon. 
These  and  other  weaknesses,  may  be  briefly  summarized  as 
follows :  — 


» 


WAGES  AND   THE  LABOR   PROBLEM  327 


1.  Limitation  of  their  Benefits.  —  They  have  often,  particu- 
larly in  their  early  history,  sought  to  gain  benefits  by  a 
selfish  and  exclusive  policy  toward  other  laborers.  In  some 
cases,  they  have  been  able  to  build  up  an  evil  labor  monopoly. 
It  must  be  admitted,  on  the  other  hand,  that  there  is  some- 
times, even  in  these  days,  valid  excuse  for  limiting  numbers. 
Unscrupulous  employers  have  at  times  sought  to  increase 
unduly  the  number  in  a  single  occupation  in  order  to  have 
a  reserve  force  of  unemployed  from  which  to  draw  in  case  of 
need  and  thus  to  keep  down  wages. 

2.  Restrictive  Policies.  —  As  a  whole,  the  trade-unions 
have  been  too  inclined  to  oppose  improved  methods  and  pro- 
cesses, and  have  adopted  various  policies  as  a  defense  against 
them.  One  cannot  fail  to  sympathize  with  their  objections 
to  the  introduction  of  improvements  of  machinery  and  or- 
ganization if  this  introduction  be  made  without  consideration 
for  the  worker's  welfare  and  be  injurious  to  him,  if  only  for 
the  time  being.  Even  if  improvements  of  this  kind  do  bene- 
fit wage-earners  in  the  long  run,  it  must  be  remembered,  that, 
as  has  been  said,  the  individual  life  is  only  a  short  run,  and 
every  means  should  be  used  to  reduce  to  a  minimum  the  suf- 
fering of  the  individual  due  to  social  progress  as  a  whole. 
Also,  the  workers  are  warranted  in  their  opposition  to  the 
inhuman  speeding-up  processes  introduced  by  certain  employ- 
ers. On  the  other  hand,  some  of  their  poHcies  unnecessarily 
hamper  the  employer ;  for  example,  the  undue  limitation  of 
output  and  of  the  number  of  apprentices.  In  opposing  me- 
chanical improvements,  not  because  they  were  detrimental 
to  the  health  of  the  workman,  but  because  he  had  no  share  in 
the  profits,  their  policy  has  sometimes  been  shortsighted. 
They  have  failed  to  recognize  clearly  that  the  satisfaction 
of  the  increasing  wants  of  the  masses  depends  largely  upon 
increasing  production  and  efficiency ;   that  the  greater  out- 


328     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

put  due  to  improvement  is  directly  beneficial  to  the  work- 
man himself,  as  representative  of  the  masses.  Neces- 
sarily, the  unions  devote  themselves  mainly  to  policies 
which  fall  within  the  general  field  of  distribution  (working 
conditions,  wages,  etc.),  and  in  this  field  they  have  been 
successful,  but  their  policies  must  be  judged  with  reference 
to  production  as  well.  In  many  parts  of  the  world  vast 
numbers  of  human  beings  still  do  not  have  enough  to  eat, 
and  a  very  little  added  to  average  incomes  means  a  very 
large  increase  in  production. 

That  it  is  not  impossible  to  strike  a  satisfactory  balance 
between  the  interests  of  the  workers  and  industrial  im- 
provement is  shown  by  the  case  of  the  printing  industry, 
where  the  union  accepted  the  introduction  of  the  linotype 
upon  the  condition  that  only  skilled  printers  should  be 
charged  with  its  operation. 

3.  Narrow  and  Shortsighted  Views.  —  It  has  been  one  of 
the  weaknesses  of  labor  organizations  in  general  that  they 
have  not  been  sufficiently  interested  in  public  measures  and 
reforms  designed  to  benefit  society.  For  example,  they  have 
given  too  little  attention  to  sanitary  matters  and  too  little 
support  to  public  health  authorities  in  efforts  to  benefit  the 
poorer  classes.  They  have  underestimated  the  importance 
of  purity  in  politics  and  a  highly  trained  civil  service.  At 
times  they  have  favored  measures  which  were  bound  to  be 
ultimately  injurious  to  them,  simply  because  such  measures 
would  increase  temporarily  the  supply  of  work. 

4.  Lack  of  Flexibility.  —  Labor  organizations  have  shown 
another  weakness  which  is  common  to  all  great  political  and 
social  organizations.  Here  red  tape  is  necessary.  General 
rules  must  for  the  most  part  govern,  and  individual  inter- 
est must  often  be  sacrificed  or  injured  in  seeking  the  welfare 
of  the  whole. 


WAGES  AND   THE  LABOR  PROBLEM  329 

III.   Methods  of  Wage  Payment 

Labor  organizations  strive  to  secure  higher  wages  and 
better  conditions  of  employment  for  workingmen  than  they 
would  otherwise  obtain,  and  thus  to  increase  their  share  of 
the  product  of  industry.  But  both  by  private  employers  and 
by  economists  other  methods  of  wage  payment  have  been 
considered  besides  the  usual  system  of  time  wages,  where  the 
laborer  is  paid  a  fixed  sum  for  each  unit  of  time  employed. 
Some  of  these  methods  call  for  discussion. 

1.  Piecework  Wages.  —  Under  this  system,  the  laborer 
is  paid  by  the  unit  of  product,  instead  of  by  the  unit  of  time. 
The  system  of  piece  wages  can  only  have  a  fair  trial  in  indus- 
tries which  allow  considerable  division  of  labor  among  occu- 
pations that  are  of  a  routine  nature.  Thus  compositors  in  a 
printing  office  may  be  paid  by  the  thousand  ems  of  type  set. 
Payment  by  the  piece,  where  possible,  has  certain  evident  ad- 
vantages both  for  laborer  and  employer,  and  has  met  with 
favor  among  certain  trade-unions.  But  in  some  industries 
abuses  of  the  system  have  been  so  many  and  so  flagrant  as 
to  arouse  active  opposition.  It  has  at  times  been  used  by 
unscrupulous  employers  to  break  down  regulations  and  even 
laws  limiting  the  hours  of  work,  and  more  frequently  still  to 
bring  about  a  reduction  of  wages.  Thus,  after  the  workers 
have  attained  a  high  rate  of  speed  by  straining  every  nerve 
and  muscle  to  earn  high  wages,  the  price  per  piece  is  "  nib- 
bled "  in  such  a  way  that  the  workmen  can  earn  by  their  in- 
creased exertion  little  if  any  more  than  they  were  earning 
before  the  piecework  system  was  introduced. 

2.  The  Sliding  Scale.  —  The  system  known  as  the  "  slid- 
ing scale,"  by  which  wages  are  made  to  depend  upon  the 
price  of  the  product,  has  been  adopted  frequently  among  iron 
and  steel  workers  and  coal  miners  in  the  United  States  and 


330     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

England.  In  recent  years  complaints  have  been  made  that 
employers  under  this  system  do  not  always  truthfully  declare 
the  price  of  product,  or  their  sales,  and  other  difficulties  have 
appeared  which  cannot  well  be  explained  here. 

3.  Profit  Sharing.  —  Under  a  system  of  profit  sharing  the 
workmen  in  any  factory,  or  at  least  a  part  of  them,  are 
allowed  to  share  in  the  profits  of  the  concern.  A  stated 
wage  is  paid,  and  then,  at  regular  intervals,  a  part  of  the 
profits  of  the  business  is  divided  among  the  employees. 
There  are  many  differences  of  detail  which  do  not  concern  us 
here.  Advocates  of  the  system  point  out  that  it  (a)  pro- 
motes economical  use  of  material  and  machinery  by  employees, 
(6)  generally  increases  their  %eal  and  efficiency,  and  hence 
results  in  (c)  a  larger  total  prodiLct  and  a  (d)  larger  income 
for  the  wage-receivers.  Its  weakness  is  that  it  is  not  expedi- 
ent to  make  the  workmen  bear  the  losses  as  well  as  participate 
in  the  gains,  while  the  system  without  such  a  provision  is 
likely  to  come  to  grief.  Profit  sharing  has  sometimes  been 
extended  to  include  capital  sharing;  that  is,  part  ownership 
of  the  capital  by  the  workmen,  with  some  participation  in  the 
management.  In  recent  years,  profit  sharing  has  been  taken 
up  with  renewed  interest  and  enthusiasm  after  an  interval 
in  which  earlier  hopes  had  given  way  to  discouragement. 

4.  The  Task  and  Bonus  System.  —  In  the  opinion  of  its 
advocates  **  Scientific  Management,"  an  American  thought- 
product  of  our  own  day,  promises  a  conservative  revolu- 
tion in  industry.  Its  claims  are  such  as  to  challenge  the 
study  and  fair  consideration  of  every  one  who  *'  loves 
his  fellow  man."  Unfortunately  we  cannot  discuss  or  even 
explain  the  system  here.  It  must  suffice  to  note  these 
salient  features.  Scientific  Management,  as  its  name  im- 
plies, proposes  to  apply  to  the  management  of  industry  the 
method  of  science,  —  wide  and  minute  observation,  analy- 


WAGES  AND   THE  LABOR   PROBLEM  331 

sis,  classification  and  organization,  etc.  Every  industry 
as  a  whole,  and  every  process  within  every  industry,  is  to  be 
analyzed  into  its  simplest  parts.  Every  unnecessary  move- 
ment or  process  is  to  be  eliminated.  Coordination  of  pro- 
cesses and  parts  and  functions  is  to  be  perfected,  to  secure 
maximum  economy  of  effort.  The  thinking  and  planning 
are  to  be  done  entirely  by  specialized  and  expert  thinkers  and 
planners.  The  worker  on  any  machine  or  hand  work  is  to 
be  freed  from  all  need  of  planning.  For  his  task  day  by  day, 
determined  by  scientific  principles,  a  standard  wage  is  to  be 
determined,  also  on  scientific  principles.  If  the  worker  does 
the  work  in  the  time  assigned,  he  is  to  receive  the  bonus, 
which  raises  his  time  rate  very  considerably  above  the  usual 
time  rate  of  the  industry.  This  "  task  and  bonus  "  system 
is  in  general  regarded  as  a  part  of  the  system  of  scientific 
management.  The  entire  system,  including  the  wage  feature, 
is  suspected  or  decried  by  leaders  of  the  working  classes, 
for  reasons  which  we  cannot  here  discuss.  But  we  must 
repeat  that  the  potentialities  of  the  system,  for  good  and  for 
harm,  are  such  that  every  public-minded  student  should  give 
the  whole  matter  careful  consideration. 

5.  Cooperation.  —  If  industry,  as  ordinarily  organized 
in  our  great  mercantile  and  manufacturing  establishments, 
may  be  likened  to  a  form  of  despotism,  an  establishment  in 
which  workmen  are  permitted  to  participate  in  capital  owner- 
ship and  management,  under  the  chief  control  of  one  who  is 
recognized  as  an  industrial  superior,  may  in  the  same  way 
be  likened  to  a  constitutional  monarchy.  And  finally,  as 
opposed  both  to  industrial  despotism  and  to  industrial  mon- 
archy, we  have  the  third  form,  industrial  democracy.  In- 
dustrial democracy  means  self-rule,  self-control,  self-direc- 
tion, by  the  workmen  in  their  efforts  to  gain  a  livelihood. 
This  is  achieved  in  pure  cooperation. 


332     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

.  Under  this  system  the  workmen  combine  their  own  capital, 
purchase  their  own  plant,  and  manage  their  own  industrial 
affairs,  in  their  own  way,  at  their  own  risk,  sharing  profit 
or  loss  as  the  case  may  be.  At  least  this  is  the  method  of 
productive  cooperation.  Distributive  cooperation,  on  the 
other  hand,  is  a  system  of  cooperation  in  wholesale  or 
retail  trading.  Distribution  is  here  used  not  in  the  sense 
in  which  it  is  ordinarily  used  in  economics,  but  in  the 
sense  in  which  we  speak  pf  the  merchant's  business  as 
distributive. 

In  distributive  cooperation,  which  has  been  more  widely 
successful  than  other  forms,  the  consumers  of  finished  goods 
combine  to  purchase  what  they  need,  and  thus  save  middle- 
men's profits.  They  form  a  regular  stock  company,  sub- 
scribe for  shares,  employ  a  manager  and  clerks,  —  who 
often  do  not  even  share  in  profits,  —  and  start  a  business. 
Profits  are  sometimes  divided  only  on  the  shares,  but  the 
approved  way  is  to  pay  a  moderate  interest  on  the  capital 
and  then  divide  profits  between  the  two  classes  of  stock- 
holders and  customers.  In  such  cases  the  customers  share 
in  proportion  to  their  purchases,  the  division  being  made 
at  stated  intervals. 

In  England  and  Scotland  distributive  cooperation  has  met 
with  very  great  success.  Productive  cooperation,  on  the 
other  hand,  has  disappointed  the  expectations  of  its  earlier 
advocates.  France  seems  to  have  had  better  success  than 
England  in  productive  cooperation.  In  the  United  States 
some  instances  of  success  are  recorded,  and  many  more  un- 
dertakings of  the  sort  have  been  partly  successful.  In  Eng- 
land and  Scotland  Wholesale  Societies  have  been  formed  for 
distributive  cooperation,  thus  furnishing  at  the  same  time  a 
steady  market  for  some  important  productive  cooperative 
concerns  which  they  have  organized. 


WAGES   AND   THE  LABOR   PROBLEM  333 

The  Strength  and  Weakness  of  Cooperation.  —  Producers' 
cooperation  (1)  prevents  strikes  by  completely  identifying 
the  interests  of  labor  and  capital.  It  (2)  stimulates  energy 
and  (3)  promotes  economy  and  thrift,  since  self-interest, 
which  usually  animates  only  the  employer,  here  animates 
all  the  cooperators.  No  slighting  of  work  can  be  tolerated 
and,  eye  service  vanishing,  (4)  much  labor  of  supervision, 
is  saved.  Best  of  all,  there  is  (5)  constant  eduxiotion  of  the 
cooperators  in  discipline  and  business  detail. 

On  the  other  hand,  to  speak  of  the  weaknesses  of  the  sys- 
tem, (1)  (Zitjic^^  coi^Twe^  often  render  the  mo vemenfof  such  a 
business  clumsy  and  slow.  Action  cannot  be  so  quick  and 
decisive  as  when  one  man  acts  on  his  own  responsibility. 
(2)  It  has  been  hard  for  workmen  to  recognize  the  necessity 
of  securing  expert  talent  for  the  work  of  supervision  and  or- 
ganization. Failure  has  often  been  due  (3)  to  m,oral  defects 
on  the  part  of  the  workmen.  (4)  Where  success  has  at- 
tended the  first  steps  of  such  a  movement,  the  very  pros- 
perity has  sometimes  produced  dissension  and  disintegration. 
These  weaknesses,  in  less  degree,  have  appeared  in  consumers' 
cooperation.  (5)  Where  success  has  been  permanent,  there 
has  been  a  tendency  to  change  from  cooperation  to  ''joint 
stockism.'^ 

Arbitration  and  Conciliation.  —  We  cannot  dismiss  this 
subject  of  the  relation  of  the  laborer  to  the  product  of  his 
labor  without  a  few  words  regarding  the  part  that  arbitration 
and  conciliation  have  played  and  are  to-day  playing  in  the 
strife  of  interests  by  which  the  social  income  is  portioned 
out.  Conciliation  is  a  term  applied  to  the  regular  efforts 
made  by  representatives  of  employer  and  employed  or  by  a  third 
person  to  prevent  differences  from  arising,  to  heal  such  differences 
before  matters  reach  an  acute  state,  or,  in  the  event  of  a  strike,  to* 
secure  a  settlement  without  the  intervention  or  adjudication  of 


334     ELEMENTARY   PRINCIPLES  OP  ECONOMICS 

outsiders.  Arbitration,  on  the  other  hand,  means  an  attempt 
to  adjust  matters  by  the  judgment  of  those  outside  the  dispide, 
and  u^su^y  only  after  acute  trouble  has  arisen.  As  is  evident, 
conciliation  is  preferable,  wherever  and  whenever  it  is 
possible. 

Both  conciliation  and  arbitration  have  accomplished  much 
for  the  preservation  of  industrial  peace  wherever  thoroughly 
and  honestly  tried.  Sometimes  boards  are  appointed  by 
employers  and  employed,  and  sometimes  such  boards  are 
appointed  by  public  authority. 

Until  near  the  close  of  the  nineteenth  century,  arbitration, 
even  when  public  authorities  provided  boards,  had  always  been 
voluntary.  That  is,  the  findings  of  arbitration  boards  were 
legally  binding  upon  neither  employers  nor  employees,  and 
therefore  gained  their  strength  from  the  awakening  of  the 
public  interest  and  the  enlightening  of  the  public  mind  as 
to  the  merits  of  the  dispute.  Indeed,  it  came  to  be  a  settled 
conclusion  in  the  minds  of  economists  and  others  that  com- 
pulsory arbitration  could  not  be  successfully  attempted  by 
government.  But  for  about  twenty  years  now  compulsory 
conciliation  and  arbitration  have  been  given  a  trial  on  a  con- 
siderable scale  in  New  Zealand  and  Australia,  the  successors 
of  the  United  States  as  laboratories  of  social  experiment. 

Opinions,  even  of  the  most  fair-mmded  and  painstaking 
investigators,  differ  as  to  the  success  of  the  experiment. 
For  several  years  the  experiment  was  rather  disparaged  than 
opposed,  when  it  was  not  enthusiastically  praised.  Unpreju- 
diced observers  generally  agree  that  the  plan  on  the  whole 
has  worked  well,  but  many  of  them  express  distrust  of  the 
long-time  result,  and  also  point  out  that  results  in  Australasia, 
even  if  satisfactory,  would  not  be  conclusive  for  the  greater 
industrial  nations.  In  recent  years,  adverse  criticism  has 
gone  to  greater,  sometimes' to  extreme,  lengths,  especially  in 


WAGES   AND   THE  LABOR   PROBLEM  335 

the  writings  of  a  few  American  critics.  On  the  other  hand, 
there  are  still  many  who  maintain  stoutly  that  Australasia 
has  really  discovered  a  helpful  method  of  promoting  indus- 
trial peace.  But  it  can  never  be  more  than  one  among  many 
methods  of  dealing  with  this  problem.  Thoughtful  people 
in  New  Zealand  often  say  that  one  of  the  merits  of  compulsory 
arbitration,  with  all  its  weaknesses  and  failures,  is  that  it 
recognizes  the  public  interest  in  industry,  because  it  is  based 
on  the  hypothesis  that  society  at  large,  as  well  as  employers 
and  employees,  has  an  interest  in  the  continuous  operation  of 
the  industries ;  and  they  hope  for  still  greater  improvements 
in  adjusting  industrial  disputes.  The  question  may  be  re- 
garded as  still  open. 

Labor  and  Factory  Legislation  and  Inspection.  —  Labor 
and  factory  legislation  and  inspection  also  need  a  few  words 
of  comment  in  this  connection,  although  the  subject  has  been 
more  fully  treated  in  the  chapters  on  the  Industrial  Stage  in 
England  and  in  the  United  States.  Labor  laws,  honestly 
conceived  and  properly  enforced,  have  been  productive  of 
incalculable  good.  Federal  and  uniform  state  legislation 
should  be  designed  to  keep  children  away  from  regular  fac- 
tory work  and  in  the  school ;  it  should  restrict  to  the  utmost 
the  employment  of  women ;  it  should  limit  the  hours  of  em- 
ployment for  different  classes  of  workpeople,  particularly 
for  women,  young  persons,  and  children,  to  the  length  of  day 
prescribed  by  medical  experience,  and  should  secure  regular 
and  convenient  hours  of  leisure,  such  as  are  afforded  by  a 
Saturday  half  holiday ;  it  should  compel  employers  to  fence 
in  dangerous  machinery  and  otherwise  guard  against  pre- 
ventable accident;  by  compulsory  insurance  or  workmen's 
compensation  acts  it  should  render  employers  pecuniarily 
responsible  for  accidents  to  employees ;  it  should  minimize 
unemployment  and  casual  employment;    it  should  provide 


336      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

for  sickness  insurance  and  for  old-age  pensions.  No  country 
has  ever  suffered  in  international  competition  by  approxi- 
mation to  the  goal  here  described.  Germany,  which  has 
done  more  than  any  other  of  the  leading  nations  along  these 
lines,  has  also  made  the  most  rapid  industrial  advance. 

SUMMARY 

1.  General  wages  are  determined  by  bargaining,  between  limits 

fixed  on  the  one  side  by  the  product  of  the  labor,  and  on  the 
other  by  the  cost  of  subsistence,  as  modified  by  the  standard 
of  living.  The  precise  wage  is  determined  by  the  relative 
strength  of  the  two  sides  to  the  bargain. 

2.  Differences  in  relative  wages  are  due  to  special  conditions  affect- 

ing different  employments. 

3.  Labor   organizations,   a   natural   development   of   modern  in- 

dustry, have  improved  the  status  of  labor. 

4.  Against  labor-unions  it  is  charged  that  they  are  often  short- 

sighted and  ultra-conservative,  and  are  forgetful  of  broad 
social  interests. 

5.  Piecework  wages,  the  sliding  scale,  profit  sharing,  the  task  and 

bonus  system,  are  various  methods  of  wage  payment  that 
have  been  tried  in  recent  times. 

6.  Arbitration  and  concihation  are  playing  an  increasing  part  in 

the  settlement  of  labor  disputes. 

7.  Society,  through  legislation  and  otherwise,  can  do  and  should 

do  much  more  than  it  has  yet  done  in  improving  the  condition 
of  the  "working  classes." 

QUESTIONS  FOR  RECITATION 

1.  In  what  ways  does  the  standard  of  hving  affect  general  wages? 

Relative  wages? 

2.  Name  the  circumstances  producing  differences  in  relative  wages. 

What  is  the  "Iron  Law  of  Wages"? 

3.  Name    the    different    "  noncompeting "    groups    of     laborers. 

Classify  some  well-known  occupations  according  to  this 
grouping. 

4.  What  three  types  of  labor  organization  are  there?     Discuss  th*^ 

change  in  the  pubhc  attitude  toward  unions. 

5.  What  are  strikes?     What  are  their  chances  of  success? 

6.  Discuss  the  different  systems  of  wage  payment ;    their  advan- 

tages and  disadvantages,  and  their  success. 


WAGES   AND    THE   LABOR   PROBLEM  337 

7.  Distinguish  between  arbitration  and  conciliation.     What  is  the 

present  status  of  the  question  of  compulsory  arbitration  ? 

8.  What  are  some  of  the  objects  that  should  be  obtained  through 

labor  legislation? 

QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  Is  an  explanation  of  why  ditch  diggers  get  low  wages  a  justi- 

fication of  the  social  and  economic  conditions  that  explain 
the  low  wages  ? 

2.  What  would  be  the  earnings  of  lawyers  or  physicians  if  all  men 

and  women  had  equal  opportunity  to  develop  knowledge 
and  skill  in  those  professions?  Is  an  hour's  work  of  a 
physician  "naturally"  more  valuable  than  an  hour's  work 
of  a  ditch  digger,  or  is  the  difference  in  value  due  to  the 
difference  in  the  supply  of  the  two  sorts  of  service  ?  Why  the 
difference  in  supply? 

3.  What  is  the  economic  effect  of  industrial  education?    Will 

it  change  the  relative  supply  of  skilled  as  compared  with 
unskilled  labor?  Will  it  change  the  relation  as  between 
manual  work  and  professional  services? 

4.  How  has   Germany's  social  legislation  increased   Germany's 

industrial  efficiency  ?  Is  there  any  stronger  reason  for  social 
legislation  than  the  reason  that  it  "pays"?  What  is  the 
goal  of  social  economic  Ufe?  . - 

5.  How  many  states  have  passed  compulsory  insurance  or  work- 

men's compensation  acts?  What  is  the  date  of  the  passage 
of  the  first  one  in  the  United  States? 

6.  How  much  does  the  United  States  pay  annually  in  war  pen- 

sions? Who  receive  the  pensions?  What  would  old-age 
pensions  on  the  Enghsh  scale  cost  in  this  country?  How 
far  would  the  recipients  be  the  same  as  those  now  receiving 
war  pensions  ? 

7.  Compare  the  merits  of  compulsory  investigation  and  com- 

pulsory arbitration  in  labor  disputes. 

8.  Ought  unions  to  be  required  by  law  to  incorporate? 

9.  What  is  a  boycott?  a  blacklist?    What  is  sweating  ?  parasitic 

industry? 

LITERATURE 

The  hterature  of  labor  in  the  United  States  is  so  voluminous 
that  any  brief  selection  is  unusually   difficult  and  embarrassing. 
The  attempt  is  made  here  to  give  at  least  one  good  title  for  each 
important  topic. 
z 


338     ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

Adams  and  Sumner :   Labor  Problems. 

Ashley,  W.  J. :   The  Adjustment  of  Wages.     (Excellent  reference  for 
'        joint  agreements,  thg   sliding   scale,   and  the   tendency  of  em- 
ployers and  employees  to  organization.) 
*"    Carleton,  F.  T. :   History  and  Problems  of  Organized  La^or. 

Clark,  L.  D. :    The  Law  of  the  Employment  of  Labor. 

Commons  and  Andrews :  Principles  of  Labor  Legislation. 
^..^ly,  R.  T. :   Studies  in  the  Evolution  of  Industrial  Society,  Bk.  II, 
Ch.  X. 

Fay,  C.  F. :   Cooperation  at  Home  and  Abroad. 

Gilman,  N.  P. :   Profit-sharing. 

Groat,  G.  G. :  An  Introduction  to  the  Study  of  Organized  Labor  in 
America. 

Hoxie,  R.  J. :  Scientific  Management  and  Labor. 

Le  Rossignol,  J.  E. :  State  Socialism  in  New  Zealand. 

Lowell,  Josephine  Shaw :   Industrial  Arbitration  and  Conciliation. 

Moore,  H.  L. :   Laws  of  Wages. 

Nearing,  Scott :   Wages  in  the  United  States. 

Reeves,  W.  P. :   State  Experiments  in  Australia  and  New  Zealand. 

Report   of  the   Industrial   Commission    (U.    S.),    1900-1901;    also 
Reports  of  the   Federal   Industrial   Relations   Commission,   1915- 
1916. 
"•^^^Schloss,  D.  F. :   Methods  of  Industrial  Remuneration. 

Schoenhof,  J. :   The  Economy  of  High  Wages. 

Siegfried,  Andre  :   Democracy  in  New  Zealand. 
/- — Smith,  Adam :   Wealth  of  Nations,  Bk.  I,  Ch.  I. 

Stimson,  F.  J. :   Handbook  to  the  Labor  Law  of  the  United  States. 

Taylor,  F.  W. :    Principles  of  Scientific  Management. 

Webb,  Sidney  and  Beatrice :  The  Case  for  the  Factory  Acts.  Indus- 
trial Democracy,  Pt.  II,  Ch.  I,  pp.  49-50;  and  A  History  of 
Trade-unionism. 


1^ 


CHAPTER  IV  . 
INTEREST 

Aftek  our  long  excursion  into  the  subject  of  labor  and  its 
reward,  it  may  be  well  for  us  to  pause  a  moment  and  place 
in  the  right  connection  what  is  to  follow.  It  should  be  re- 
called that  under  the  general  subject  of  distribution,  or  the 
division  of  the  social  income  among  the  factors  that  have 
worked  to  produce  it,  we  have  now  discussed  the  subject  of 
rent,  the  share  received  by  the  owners  of  land,  and  wages, 
the  share  received  by  labor.  We  come  now  in  regular  order 
to  a  discussion  of  the  share  apportioned  to  the  owners  of 
capital.  Land  and  labor,  in  their  broadest  sense,  are  the  ^ 
only  origmal  elements  in  production.  Of  course,  as  has  been 
explained,  land  includes  not  only  building  lots  and  farming 
land,  but  also  mines  and  rivers  and  fisheries,  and,  in  short, 
all  natural  and  unproduced  agencies  of  production  other  than  y/ 
labor.  Capital,  on  the  other  hand,  is  not  a  primary  ory 
original  factor,  but  a  secondary  or  derived  one. 

Unlike  land,  capital  is  produced,  but  it  is  produced  for^^ 
he  purpose  of  further  production.     In  fact,  we  may  define) 
capital  as  the  produced  instruments  of  production.  ^ 

How  Interest  is  Determined.  —  Interest  is  the  return  to 
capital.  By  what  law  is  its  amount  determined?  This 
question  has  been  continually  discussed  and  still  appears  to 
many  economists  an  unsettled  problem.  The  ancients  in 
general  denied  that  interest  rested  on  any  justifiable  founda- 
tion.   Aristotle  thought  it  unjust,  and  Cicero  classes  it  with 

339 


340      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

murder.  Throughout  the  Middle  Ages  it  was  condemned 
«  by  the  Church  and  prohibited  by  statute.  One  of  the  main 
reasons  for  this  attitude  is  found  in  the  fact  that  until  recent 
^centuries Jittle  ca2ital  was  lent  for  productive  purposes. 
^  Loans  were  usually  made  for  personal  consumption  and  for 
the  relief  of  the  distressed.  The  lender  could  not  have  used 
productively  the  amount  lent,  and  the  borrower  did  not 
desire  the  loan  for  productive  uses.  Despite  public  opinion 
and  the  law,  however,  the  taking  of  interest  continued  cus- 
tomary wherever  commerce  was  developed,  and  with  the 
industrial  awakening  in  the  modern  period  of  capitalism  it 
was,  of  course,  allowed  as  a  necessity. 

Being  allowed,  it  must  needs  be  justified,  and  the  explana- 
tions and  justifications  have  been  numerous  and  various. 
Earlier  economists  explained  the  laws  of  rent  and  wages,  and 
then  naively  concluded  that  capital  had  what  was  left. 
The  owner  of  capital  was  thus  made  the  "  residual  claimant  '* 
"^  in  distribution.  Others  have  thought  that  capital  and  land 
receive  returns  according  to  fixed  laws,  and  that  labor  is  the 
residual  claimant.  The  truth  seems  to  be  that  no  one  of  the 
three  is  a  residual  claimant,  but  that  each  receives  a  return 
determined  by  regular  laws.  What,  then,  shall  we  say  is  the 
special  law  by  which  interest  is  determined  ?  In  answering 
this  question,  we  shall  try  to  make  a  statement  of  the  case 
which  shall  reconcile  conflicting  theories,  at  the  same  time 
that  we  indicate  briefly  what  those  theories  are. 

Fallacious  Views  Regarding  Interest.  —  To  begin  with,  let 
us  clear  the  ground  by  ridding  the  mind  of  certain  views  as  to 
interest  that  are  very  widely  held  and  that  stand  squarely 
across  the  path  leading  to  just  and  clear  views  on  the  subject. 

There  is  a  very  widespread  opinion  that  the  payment  of 

^^  I  interest  to  individual  owners  of  capital  is  necessary  to  any 

accumulation  of  capital.    This  is  clearly  not  so.     If  society 


INTEREST  341 

were  to  take  over  and  manage  all  industry  or  the  greater 
part  of  industry,  it  could  create  and  maintain  the  needed 
capital  out  of  the  product  of  the  industry.    Society  as  a  whole  ^  j^- 
would  in  that  case  postpone  possible  present  satisfactions  for  y^ 
the  purpose  of  easier  and  richer  satisfactions  from  the  result-  / 
ing  capitalistic  production.     It  may  well  be  that  we  do  better 
to  leave  the  accumulation  of  capital  to  the  self-interest  of 
individuals,  but  we  have  no  right  to  think  or  to  assert  that 
capital  can  be  secured  in  no  other  way. 

Another  fallacy,  perhaps  as  widely  held,  and  even  more  ^, 
obstructive  to  just  views  of  capital  and  interest,  is  the  ideal 
that  intere&t  is  fundamentally  an  amount  olmonex  annually) 
paid  for  the  use  of  some  larger  amouat  of  money.    Of  course,' 
on  the  surface  this  seems  to  be  true;    otherwise,  the  idea 
would  never  have  gained  credence.    But  a  little  reflection 
will  show  the  fallacy  and  the  harm  in  the  fallacy.     In  the 
first  place,  it  will  be  found  that  actual  money  is  rarely  lent, 
borrowed,   or  repaid.    What  is  transferred   is  control  of 
wealth,  —  some  form  of  purchasing  power.    As  has  been 
explained  in  an  earlier  chapter,  a  business  man  goes  to  his 
bank  and  sells  his  note,  secured  or  unsecured,  in  exchange  for 
a  deposit.    Against  this  deposit  he  draws  checks  at  need  to 
purchase  needed  goods,  and  especially  capital  in  various 
forms.    The  bank  pays  out  little  gold  or  silver.     In  so  faA 
as  it  cannot  balance  checks  against  checks  and  so  avoid  pay-y 
ment,  it  pays  out  various  forms  of  notes  which  are  themselves  \ 
merely  credit  instruments.    Thus  it  is  clear  that  when  men  \ 
borrow,  they  do  not  usually  or  really  borrow  money  at  all/ 
but  only  purchasing  power. 

But  again,  such  purchasing  power,  as  the  name  implies, 
is  not  the  real  purpose  or  end  of  the  borrowing.  Nearly  all 
borrowing  has  as  its  end  the  securing  of  capital,  —  real, 
physical,  capital  goods,  to  be  used  in  the  work  of  produc- 


342      ELEMENTARY   PRINCIPLES   OF  ECONOMICS 

tion.  If  it  were  just  as  convenient  to  supply  the  capital 
goods  in  the  first  instance,  the  business  man  would  rather 
have  it  so.  And  if  capital  could  be  so  lent  and  borrowed, 
men  could  not  have  fallen  into  certain  of  their  present  wrong 
views  of  interest. 

Probably  nine  persons  out  of  ten,  perhaps  ninety-nine 
persons  out  of  every  hundred,  believe  that  the  rateof  interest 
depends  upon  the  amount  ^f  money.  ^We^  have  already 
given  one  way  by  which  this  fallacy  may  be  detected,  but 
experience  gives  sufficient  warning  that  further  explanation 
is  required.  And  here  again  explanation  may  perhaps  best 
take  the  form  of  illustration. 

Assume  a  society  with  a  given  quantity  of  circulation 
medium,  —  and  with  a  given  quantity  of  capital  goods.  In 
this  society  John  Doe  is  thinking  of  buying  a  cow  for  his 
dairy.  At  the  actual  level  of  prices  he  calculates  how  much 
he  must  pay  for  "  keeping  "  the  cow,  including  the  feed, 
dairyman's  wages,  etc.,  and  how  much  the  milk  and  other 
products  will  bring  in  the  market,  at  the  existing  price  level. 
If,  allowing  for  risk,  depreciation,  etc.,  he  calculates  that 
the  products  year  by  year  will  sell  for  S3  more  than  "  cost 
of  keep,"  he  can,  on  a  6  per  cent  basis,  afford  to  pay  $50 
for  the  cow.  And  if  the  current  interest  rate  is  6  per  cent, 
$50  will  be  the  normal  value  of  the  cow. 

Now  assume  that  this  quantity  of  money  is  doubled,  and 
that,  in  accordance  with  the  quantity  theory  of  money, 
prices  are  doubled,  what  will  be  the  result  ?  Doe  now  cal- 
culates as  before,  but  with  all  prices  doubled,  —  prices  of 
feed,  labor,  etc.,  on  the  one  side,  and  of  milk,  cream,  butter, 
etc.,  on  the  other.  And  by  the  same  calculation  as  be- 
fore, he  finds  now  a  surplus  of  $6.  Cleariy  then  he  can 
now  afford  to  pay  S6  a  year  for  the  amount  of  purchasing 
power  required  to  secure  his  possession  of  the  cow.    But 


INTEREST  343 

the  rate  of  interest  will  remain  unchanged,  both  because 
he  can  now  get  $100  of  purchasing  power  as  easily  as  he 
could  before  get  $50  of  such  power,  and  because  the  price 
of  the  cow  has  now  doubled  with  other  prices,  and  stands 
at  $100.  And  $6  is  6  per  cent  of  $100,  just  as  $3  is  6  per 
cent  of  $50. 

If  now  we  have  succeeded  in  banishing  forever  from  the 
mind  of  the  student  the  fallacy  that  the  interest  rate  is  a 
function  of  the  amount  of  money,  we  may  go  on  to  explain 
how  interest  really  is  determined. 

Demand  and  Supply.  —  In  the  first  place,  it  is 'probable 
that  all  economists  would  agree  that  interest,  which  expresses 
the  annual  value  of  the  use  of  capital,  is  determined,  as  is 
all  value,  by  the  relation  between  the  demand  for  capital 
goods  and  the  supply  of  them.  Where  there  is  a  strong 
demand  for  a  limited  supply  of  such  goods,  the  marginal 
utility  of  the  capital  will  be  high,  and  the  capitalist  can  exact 
a  large  return  in  the  form  of  interest.  If  the  demand  for 
capital  be  slight  relatively  to  the  supply,  then  the  rate  of 
interest  will  be  low.  Manifestly,  however,  this  does  not 
carry  us  far  upon  our  way.  We  proceed  to  inquire  what  it  is 
that  determines  the  demand  and  supply. 

The  Productivity  Theory.  —  Investigation  of  the  demand 
for  capital  brings  us  to  one  theory  of  interest  which  has  been 
widely  accepted,  —  the  "  productivity  theory."  To  the 
older  economists,  who  regarded  most  economic  questions 
from  the  point  of  view  of  the  business  manager,  it  seemed 
sufficient  to  say  that  interest  is  paid  because  capital  is  pro- 
ductive, and  that  the  amount  of  interest  is  determined  by 
the  degree  of  productiveness.  From  the  side  of  demand  we 
may  agree  that  the  productivity  theory  does  give  us  an 
explanation  of  interest.  When  capital  is  very  productive 
there  will  be  a  great  demand  for  it. 


344     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  Marginal  Productivity  Theory.  —  In  recent  years  a 
development  of  the  productivity  theory  has  been  brilliantly 
advocated  and  widely  accepted.  The  theory  is  essentially 
an  application  of  the  marginal  utility  analysis  to  the  field  of 
distribution.  The  utility  of  capital  is  not  immediate,  as  in 
the^ase  of  consumers'  goods,  but  intermediate.  We  use 
capital  not  to  eat  or  wear,  but  to  help  in  making  things  to 
eat  and  wear.  And  of  capital,  as  of  labor,  it  may  be  said 
that  the  more  there  is  of  it,  the  less  productive  will  any  part 
of  it  be,  for  two  reasons.  First,  if  capital  be  increased  while 
the  factor  with  which  it  cooperates  remains  unchanged  in 
quantity,  the  physical  product  will  not  increase  proportion- 
ately with  the  increase  of  capital.  Thus  if  a  thousand  work- 
men be  supplied  at  the  same  task  with  increasing  quantities 
of  implements  of  production,  they  will,  it  is  true,  continually 
increase  output,  but  not  in  proportion  with  the  increase  of 
their  equipment.  In  the  second  place,  the  increased  output 
will  have  a  less  marginal  utility.  Products  to-day  are  the 
results  of  widely  varying  combinations  of  labor  and  Capital. 
Increasing  capital,  therefore,  by  increasing  output  according 
to  the  degree  in  which  capital  is  important  in  production, 
will  in  the  same  varying  degree  lower  the  exchange  values 
of  those  goods  as  compared  with  the  others^  Briefly,  then, 
it  may  be  stated  as  a  law  of  capital :  other  things  being  equal, 
every  increase  of  capital  results  in  a  lowering  of  its  marginal 
value  productivity.  Adherents  of  this  theory  go  on  to  add 
that  in  the  actual  world  capital  receives  in  interest  an  amount 
equal  to  its  marginal  productivity.  While  the  productivity 
theory,  and  still  more  the  marginal  productivity  theory,  may 
offer  for  some  purposes  a  good  way  of  explaining  why  men  can 
and  will  pay  interest,  it  does  not  explain  why  they  must  do  so. 

The  Abstinence  Theory.  —  To  understand  why  interest 
mu^t  be  paid,  we  have  to  investigate  the  subject  of  the  supply 


INTEREST  345 

of  capital,  and  this  brings  us  first  to  the  so-called  "  absti- 
nence theory."  It  has  been  said  by  some  economists  that 
interest  is  sufficiently  explained  when  it  is  described  as  the 
wage  or  reward  for  abstinence.  As  we  have  seen,  capital  is 
the  result  of  a  special  production  made  possible  by  saving. 
Saving  or  abstinence  may  not  in  any  particular  instance  in- 
volve any  great  degree  of  suffering.  Millionaires  who  do 
not  consume  at  once  and  finally  all  that  they  have,  are  not 
thereby  made  to  suffer  the  pangs  of  hunger.  It  may  be  that 
they  would  have  great  difficulty  in  consuming  any  large  part 
of  their  goods.  But  saving  does  mean,  none  the  less^fhe  can- 
sumptioiLof  less  thajLPne  might  consume.  We  cannot  have 
capital  if  all  men  consume  all  the  goods  that  they  can  obtain. 
It  may  help  us  to  understand  the  relation  between  saving 
and  interest  if  we  think  of  actual  saving  as  being  the  result 
of  varyingdegrees  of  self-denial.  There  are  probably  many 
persons  who  would  rather  iiut_bjL4iart  of  their  present  goods 
even  if  they  could  not  thus  obtain  interest,  or  even  if  they 
had  to  pay  a  slight  amount  forThe  safe-keeping  of  their 
savings.  If  very  little  capital  were  required,  therefore,  the 
interest  rate  might  fall  to  zero,  since  those  who  wished  to 
save  would  be  glad  to  lend  their  goods_with  a  simple  guaran- 
tee of  repayment.  But  if  capital  is  highly  productive  and  in 
great  demand,  it  will  not  be  possible  to  secure  the  desired 
capital  from  the  savings  of  those  whose  abstinencerepresents 
no  sacrifice.  It  may  be  that  when  more  capital  is  demanded, 
an  increase  which  will  bring  the  productiveness  of  the  capi- 
tal and  the  abstinence  necessary  to  its  formation  into  equi- 
librium, may  be  effected  at  a  rate  of  one  per  cent.  Suppose 
the  productiveness  of  the  capital  to  be  still  further  increased. 
Then  those  who  wish  to  engage  in  productive  enterprises 
will  be  able  to  pay  a  higher  rate  and  will  increase  the  demand 
for  capital.    But.  other  things  being  equal,  those  who  would 


346     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

just  save  the  needed  amount  of  capital  at  one  per  cent  must 
be  paid  a  higher  price  if  they  are  to  undergo  the  added  sacri- 
fice necessary  to  the  accumulation  of  more  capital.  This  ex- 
planation should  make  it  clear  that  on  the  side  of  supply  it 
is  to  the  marginal  estimate  of  the  sacrifice  represented  by  the 
marginal  investment  that  the  rate  corresponds.  We  may  say 
in  conclusion  of  this  phase  of  the  matter,  then,  that  interest 
is  fixed  on  the  side  of  the  supply  of  capital  at  a  point  which 
just  repays  the  sacrifice  involved  in  the  marginal  investment. 
As  has  been  said,  this  rate,  thus  fixed,  also  equalizes  the 
sacrifice  of  the  marginal  investor  with  the  productivity  of 
the  marginal  capital  in  use. 

The  Austrian  —  or  Agio  —  Theory  of  Interest.  —  There 
is  to-day  a  very  general  opinion  among  economists  that  none 
of  the  theories  that  have  been  explained  above  really  goes 
to  the  root  of  the  matter.  We  have,  therefore,  to  explain 
another  theory,  which  has  in  recent  years  received  a  great 
deal  of  attention.  This  is  often  called  the  Austrian  theory, 
from  the  country  of  its  origin.  It  is  also  frequently  distin- 
guished as  the  "  agio  "  theory,  from  the  ItaHan  "  aggio  " 
(meaning,  among  other  things,  discount),  because  it  finds  the 
explanation  of  interest  in  the  fact  that  future  goods  are 
discounted  in  terms  of  present  goods,  as  we  shall  immediately 
explain. 

We  say  that  capital  is  productive  and  hence  bears  in- 
terest. But  why,  fundamentally,  is  it  productive  and  of 
what  is  it  productive  ?  Strictly  speaking,  capital  is  not  pro- 
ductive at  all.  To  say  that  capital  is  productive  is  merely  a 
short  way  of  saying  that  human  labor  produces  more  by  the 
use  of  capital  than  without.  But  granting  that  capital  is 
productive  in  this  sense,  what  is  it  that  capital  produces? 
Generally  the  things  that  it  "  produces  "  are  quite  different 
from  itself.    Machines  make  shoes.     Railways  carry  goods 


INTEREST  347 

and  persons.  How  can  we  compare  the  shoes  with  the 
machines,  or  the  railway  product  with  the  railway  equipment  ? 
Obviously,  if  we  are  to  explain  interest,  we  must  claim  that 
the  aggregate  value  of  the  things  produced  is  greater  than 
the  value  of  the  producing  agents,  and  that  this  difference 
in  value  is  jthe  interest.  But  have  we  any  right  to  assume 
that  the  value  of  tlie  product  is  greater  than  the  value  of 
the  agent  ?  To  be  sure,  we  know  that  the  difference  in  value 
exists.  But,  by  the  same  token,  we  know  that  there  is  such 
a  thing  as  interest.  It  is  admitted,  too,  that  the  difference 
in  value  and  interest  are  the  same  thing,  but  it  is  contended 
that  the  real  problem  for  us  is  to  explain  why  there  is  this 
difference  in  value,  which  is  admittedly  interest.  Why  does 
the  value  of  the  aggregate  product  of  capital  exceed  the 
value  of  the  capital  itself  ?  And  so,  while  certain  economists 
explain  that  the  marginal  productivity,  theory  is  a  sufficient 
explanation  of  the  interest  problem  from  the  point  of  view 
of  demand,  but  that  it  needs  to  be  supplemented  by  a  cor- 
responding theory  from  the  point  of  mew  of  supply,  other 
economists  hold  that  the  real  explanation  of  interest  lies 
deeper,  and  that  their  theory,  rightly  conceived,  is  an  expla- 
nation of  both  the  supplx_side-and  the  demand  side  of  the 
interest  problem. 

It  is  the  position  of  the  authors  of  this  book  that  the 
theories  explained  above  are  partial.  They  are  *'  true  "  in 
so  far  as  they  help  us  to  sum  up  and  understand  large  niun- 
bers  of  economic  facts  in  a  simple  way.  In  other  words,  the 
theories  are  "  true  "  in  so  far  as  they  are  useful  or  usable. 
And  for  many  purposes  these  theories  are  probably  more 
"  workable  "  than  the  "  Austrian  "  theory,  which  we  shall 
now  explain,  admitting,  though  we  do,  that  that  theory  in- 
cludes in  its  scope  more  economic  facts,  and  rests  upon  a 
deeper,  stronger,  and  more  philosophical  foundation. 


348     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

What,  then,  is  it  that  determines  the  rate  which  the  mar- 
ginal investor  will  regard  as  just  repaying  him  for  his  saving 
or  abstinence  ?  And  what  is  it  that  causes  the  value  of  the 
aggregate  product  of  capital  to  be  greater  than  the  value  of 
the  capital  itself?  These  questions  both  find  a  common 
answer  in  the  Agio  theory  of  interest,  which  is  usually  asso- 
ciated with  the  name  of  Professor  von  Bohm-Bawerk,  one 
of  the  leaders  of  the  so-called  Austrian  or  psychological  school 
of  economists.  To  repeat  our  questions  in  another  form, 
Why  is  it  that  men  —  for  instance,  the  marginal  investor  — 
will  not  give  $50  now  for  $50  ten  years  hence,  even  though 
all  risk  should  be  amply  covered  by  insurance?  Why  will 
not  the  marginal  investor  lend  his  money  without  interest 
even  when  the  loan  involves  no  risks?  And  why  is  it  that 
the  value  of  goods  produced  by  machinery,  after  deduction 
of  amounts  representing  all  other  expenses  of  production,  is 
found  greater  than  the  value  of  the  machinery  itself  ?  Simply 
because  desire^  which  is  the  source  of  valiie,  is  stronger  for 
things  near  than  for  things  far  away. 

Human  experience  in  a  thousand  lines  furnishes  abundant 
proof  of  this.  The  wants  of  men  are  like  Esau's  hunger. 
He  would  rather  have  —  he  values  higher  —  a  mess  of  pot- 
tage now  than  a  whole  inheritance  in  the  future.  "  A  bird  in 
the  hand  is  worth  two  in  the  bush."  Distant  enjoyments 
are  vague  to  men's  minds,  while  near  ones  are  vivid  and 
tempting.  Thus  it  is  that  a  man  will  rarely  give  present 
goods  for  future  goods  of  like  kind  and  amount,  and  hence 
future  goods  are  less  valuable  than  present  goods. 

Yet  it  becomes  apparent  on  a  moment's  reflection  that 
there  is  the  greatest  difference  among  men  in  the  compara- 
tive estimates  they  place  upon  the  present  and  the  future. 
This  is  in  part  (1)  a  matter  of  civilization.  Thus  travelers 
have  again  and  again  pointed  out  that  among  primitive 


INTEREST  349 

peoples  there  is  the  utmost  recklessness  and  improvidence  of 
the  futm'e.  Hence,  among  savages,  if  interest  were  de- 
manded or  allowed  at  all,  the  rate  would  be  very  high.  The 
comparative  valuation  of  present  and  future  enjoyments 
(2)  varies  widely  also  among  civilized  men.  Some  there  are 
who  are  almost  as  reckless  of  the  future  as  is  the  savage, 
while  there  are  others  who  would  be  glad  to  exchange  a 
quantity  of  present  goods  for  a  like  quantity  or  even  a  less 
quantity  assured  to  them  in  the  future.  The  provident 
classes  would  therefore  save  even  if  the  rate  of  interest 
should  fall  to  a  very  low  figure.  Finally,  (3)  the  compara- 
tive valuation  varies  widely  according  to  the  affluence  or 
wealth  of  the  individual.  What  we  must  have  to  satisfy  the 
pangs  of  hunger  to-day  is  evidently  more  highly  valued  than 
the  same  things  can  be  when  obtainable  only  at  a  future 
time.  Other  things  equal,  then,  the  millionaire  will,  of 
course,  overvalue  the  present  less  than  will  his  poorer  neigh- 
bor. The  man  who  has  an  income  just  sufficient  to  satisfy 
his  physical  requirements  cannot  save,  no  matter  how  high 
the  interest  rate  may  be. 

And  so  the  Agio  theory  sums  up  for  us  briefly  a  multitude 
of  facts  bearing  upon  the  supply  of  capital  and  the  demand 
for  it.  Saving,  or  investment,  and  produx^tivity  are  alike  due  . 
to  differences  in  value  between  present  and  future  goods  of  like 
kind  and  amount.  The  interest  {or  agio)  is  due  to  this  differ- 
ence. And  the  rate  of  interest  equals  and  is  determined  by 
the  marginal  difference,  i.e.  by  the  difference  as  it  exists  in  the 
minds  of  investors  or  savers  and  determines  their  marginal 
saving. 

Just  one  other  concrete  illustration.  Suppose  that  with 
the  interest  rate  standing  at  a  certain  point,  something 
occurs  to  change  the  minds  of  the  investors.  Endow  them 
all    in    equal    degree   with    greater    foresight   of   possible 


350     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

future  pleasures  and  pains.  At  once  in  the  minds  of  all 
there  is  less  difference  in  their  valuation  of  present  and 
future  goods.  They  value  the  future  more  highly,  and  by 
necessity,  since  value  is  relative,  they  value  the  present  less 
highly  than  they  did  before.  Concretely,  they  value  the 
machine  more  highly  than  before;  the  goods  produced  by 
it  day  by  day  they  value  less  highly.  The  difference  between 
the  value  of  the  machine  and  the  value  of  its  aggregate 
product  falls.  On  the  other  hand,  those  who  have  been 
saving  save  more,  while  many  who  have  not  saved  before 
join  the  ranks  of  investors,  —  which  means,  as  we  have  ex- 
plained in  an  earlier  chapter,  that  they  spend  more  for  future 
goods  and  less  for  present  goods,  thereby  bidding  up  the 
price  of  machines,  and  at  the  same  time  weakening  the  market 
for  the  product  of  machinery.  From  this  concrete  statement 
the  student  may  see  how  the  difference  in  value  of  present 
afid'Iuture  goods  determines  at^  once  the  supply  of-iajjital 
and  the  deman^Tor  it,  and,  through  their  interaction^jbhe 
rate  of  interest. 

Summary.  —  Let  us  now  retrace  the  steps  we  have  taken 
and  state  in.  summary  form  the  theory  of  interest  which  is 
here  developed.  Interest  is  determined  primarily  by  the  rela- 
tion between  the  demand  for  capital  and  the  supply  of  it,  the 
rate  being  such  as  will  make  possible  the  widest  possible  u^e  of 
capital  in  the  existing  state  of  demand  and  supply.  The  de- 
mand for  capital  is  determined  by  its  marginal  productivity. 
The  supply  is  determined  by  the  marginal  sacrifice  involved 
in  saving  or  postponement  of  consumption.  Fundamentally, 
supply  and  demand  are  both  determined  by  the  marginal  dif- 
ference in  the  value  of  present  and  future  goods  of  like  kind 
and  amount,  and  the  rate  of  interest  equals  thi^  ogiOj. 

Different  Loan  Markets.  —  As  we  have  made  clear  in  the 
foregoing,  the  loans  that  lead  all  others  in  the  modern  world, 


INTEREST  351 

and  that  exercise  a  controlling  influence  upon  interest,  are 
(1)  loans  for  the  purpose  of  acquiring  and  maintaining  capital 
equipment  for  purposes  of  production.  Though  the  loan  is 
usually  made  in  the  form  of  money  or  credit,  it  is  not  the 
supply  of  money  that  controls  the  market  for  such  loans. 
If  the  capital  goods  could  be  secured  directly,  it  would  be 
even  better  and  more  economical.  All  that  has  gone  before 
in  this  chapter,  therefore,  is  in  explanation  of  interest  and 
the  rate  of  interest  on  such  loans. 

There  are,  however,  (2)  loan  markets  in  which  money  itself, 
or  credit,  m.ay  practically  he  regarded  as  the  real  end  and  object 
of  the  loan.  In  the  "  money  streets  "  of  great  financial 
cities  men  are  regularly  incurring  obligations  which  can  be 
met  by  money  or  credit  payment  only.  If  one  were  to  offer 
them  other  capital  goods,  the  goods  would  be  refused  unless 
they  could  be  exchanged  at  once  and  without  loss  for  money 
or  credit.  In  these  narrow  markets,  it  may  in  truth  be 
said  that  the  rate  of  interest  depends  upon  the  supply  of 
money  and  credit  and  the  demand  for  them  in  those  mxirkets. 
And  it  must  further  be  admitted  that  in  those  markets,  in 
an  unusual  degree,  the  amount  of  credit  depends  upon  the 
amount  of  money,  largely  in  the  form  of  gold  or  gold  certifi- 
cates. As  the  reserves  accumulate,  the  banks  find  it  neces- 
sary to  lower  the  short  time  interest  rate,  in  order  to  profit '  v 
the  credit  that  they  may  safely  build  upon  the  reserves. 
And  it  thus  happens  that  extreme  fluctuations  in  interest 
rates  occur  in  such  markets,  even  within  short  intervals  of 
time.  Thus  the  "  street  "  in  New  York  has  seen  the  "  call 
rates  "  fluctuate  within  a  few  months  from  1  per  cent  to 
100  per  cent.  It  cannot  be  too  strongly  emphasized,  how- 
ever, that  the  student  should  keep  the  thought  of  money  or 
credit  entirely  out  of  mind  when  he  is  considering  or  dis- 
cussing the  general  problem  of  interest. 


352      ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

The  interest  paid  on  (3)  loans  of  wealth  which  is  not  capital, 
—  not  used  for  purposes  of  further  production,  —  is  governed 
by  the  rate  of  interest  paid  for  capital.  It  is  the  same  per- 
centage of  value.  The  obvious  reason  is  the  power  of  the 
owner  to  sell  his  noncapitalistic  goods  and  invest  the  pro- 
ceeds in  capital  goods.  If  we  should  adopt  the  view  that 
houses  are  not  capital,  but  simply  "  consumers'  goods,"  we 
should  similarly  have  the  rate  of  interest  governed  by  the 
forces  controlling  the  rate  of  interest  on  capital. 

Practical  Circumstances  Affecting  the  Rate.  —  There  is 
both  a  real  and  an  apparent  fluctuation  in  the  interest  rate 
from  place  to  place  and  from  time  to  time.  The  apparent 
fluctuation  is  that  which  is  due  to  the  inclusion  of  insurance 
against  risk  in  a  single  rate  with  the  real  interest.  Thus 
loans  on  good  security  always  command  a  lower  rate  than 
others.  This  simply  means  that  a  man  who  takes  some 
risks  as  to  getting  his  money  back  adds  to  the  pure  interest 
a  premium  to  cover  the  risk.  Gross  interest,  then,  includes 
the  two  elements  of  net  or  pure  interest,  —  payment  for 
the  loan  itself,  —  and  insurance  against  risk  of  loss,  or  of 
trouble  in  collection.  Naturally,  therefore,  interest  tends 
to  be  higher  in  uncivilized  countries  and  backward  communi- 
ties. Again,  loans  that  run  for  years  usually  command  a 
slightly  lower  rate  than  loans  made  for  months,  because  with 
such  loans  the  lender  is  saved  the  trouble  of  frequent  rein- 
vestment. Aside  from  these  conditions,  moreover,  a  steady 
diminution  of  pure  or  net  interest  occurs  in  most  civilized 
countries.  This  last  change  is  due,  not  to  lessened  risk,  but 
to  the  change  in  mental  comparisons  between  present  and 
future  goods.  Present  wants,  being  better  satisfied,  are 
less  clamorous  and  contrast  less  vividly  with  future  wants. 
Moreover,  providence  increases  with  civilization.  The 
lowering  of  the  pure  interest  rate  means  that  the  great  body 


INTEREST  353 

of  people  are  both  less  needy  in  the  present  and  more  thought- 
ful of  the  future. 

The  Recent  Rise  in  the  Interest  Rate.  —  We  began  our 
discussion  of  interest  with  the  careful  explanation  that  it  is 
determined  fundamentally,  not  by  the  supply  of  money,  but 
by  the  supply  of  capital.  Later  we  qualified  this  by  explain- 
ing how  in  the  pure  "  money  "  markets  of  financial  centers, 
the  rate  of  interest  varies  inversely  with  the  volume  of  avail- 
able money  and  credit.  The  student  may  have  a  moment 
of  amazed  impatience  when  now  he  is  finally  told  that,  under 
certain  circumstances,  interest  varies  directly  vrith  changes  in 
the  volume  of  money  and  credit.  Yet  precisely  this  must  now 
be  said  and  explained.  Between  1900  and  1915  there  was 
an  almost  uninterrupted  rise  in  the  rate  of  interest  on  long- 
time loans  represented  by  such  securities  as  bonds.  Bonds 
paying  as  low  as  three  and  four  per  cent,  or  even  less,  could 
be  sold  at  par  in  the  opening  years  of  the  century.  Those 
same  bonds  now  sell  at  a  heavy  discount,  so  that  the  pur- 
chaser at  the  lower  price  receives  an  interest  yield  on  his 
investment  rising  to  six  per  cent  or  over.  And  bonds  of 
some  great  railways  now  have  to  offer  interest  rates  of  six 
per  cent  or  better  in  order  to  sell  at  par. 

We  have  already  explained  in  another  chapter  the  re- 
markable rise  in  the  general  price  level  that  has  resulted 
from  the  great  increase  of  money  and  credit  in  the  years 
from  1897  to  1915.  In  all  that  period  manufactm-ers  were 
buying  materials  and  labor  at  the  price  level  of  one  period 
and  selling  the  finished  product  at  the  price  level  of  a  slightly 
later  time.  Broadly  speaking,  there  was  a  continually  re- 
curring gap  between  the  two  price  levels,  which  redounded 
to  the  advantage  of  the  manufacturer.  Under  such  circum- 
stances, business  men  were  more  keenly  competitive  in  the 
urgency  of  their  demand  for  the  world's  stock  of  capital 
2a 


354     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

goods,  and  this  sharpened  demand  tended  constantly  to  force 
up  the  price  paid  for  the  use  of  capital,  i.e.  interest. 

On  the  other  hand,  as  we  have  explained  in  the  chapter 
on  Money,  inflation  of  money  and  credit  lessens  the  purchas- 
ing power  of  money.  A  man  who  put  $1000  into  a  savings 
bank  in  1900  would  find  when  he  withdrew  it  in  any  subse- 
quent year  that  he  was  getting  back  less  purchasing  power 
than  he  had  originally  put  in.  Under  such  conditions,  long 
continuing,  there  would  be  a  tendency  for  those  who  saved 
to  avoid  saving  except  at  a  higher  rate.  And  this  higher 
rate,  as  we  have  seen,  business  men  would  be  led  by  keen 
competition  to  pay. 

This  same  phenomenon  may  also  be  explained  from  the 
point  of  view  of  the  Agio  theory  of  interest.  Steady  and 
long-continuing  rise  of  prices  results  in  an  increase  in  the  rela- 
tive value  of  present  as  compared  with  future  goods,  thus 
affecting  in  the  same  way  the  economic  calculations  of  those 
who  use  capital  and  of  those  from  whose  saving  the  capital 
is  derived. 

In  conclusion,  it  should  be  emphasized  again  that  in  this 
case  it  is  really  the  capital  interest  that  undergoes  a  change, 
although  here  it  is  a  great  and  long-continued  change  of  the 
quantity  of  money  that  results  in  the  new  equation  of  capital 
demand  and  capital  supply. 

Usury.  —  The  word  "  usury,"  once  applied  to  all  interest, 
is  now  applied  only  to  interest  in  excess  of  the  rate  allowed 
by  law.  The  question  of  whether  laws  should  be  framed 
limiting  the  rate  to  be  received  and  fixing  penalties  for  vio- 
lation has  been  much  discussed.  Economists  are  generally 
agreed  that  the  state  should  not  attempt  to  establish  a  rate, 
except  so  far  as  it  can  confine  the  action  of  the  law  to  loans 
to  the  needy  for  personal  consumption.  In  cases  of  this 
kind  the  experience  of  the  world  is  increasingly  in  favor  of 


INTEREST  355 

regulation.  One  effect  of  usury  laws  is  worthy  of  special 
notice.  When  the  law  has  established  a  fixed  rate,  under 
penalties,  it  may  happen  that  law-abiding  people  will  be  un- 
willing to  make  loans  at  the  legal  rate,  and  that  those  who 
are  willing  to  violate  the  laws  will  thus  have  an  added  reason 
for  charging  a  higher  rate  than  they  otherwise  would.  Com- 
petition among  lenders  is  lessened,  and  the  risk  of  lending 
is  increased.  Both  these  items  act  in  the  direction  of  exces- 
sive rates.  Though  many  countries  have  laws  designed  to 
prevent  the  taking  of  excessive  interest,  the  commercial 
world,  which  is  regulated  in  great  measure  by  the  honor  of 
business  men,  commonly  proceeds  in  disregard  of  the  law's 
penalties.  Those  who  borrow  at  excessive  rates  do  so  will- 
ingly and  knowingly,  and  are  in  honor  bound  not  to  appeal 
to  the  law  to  escape  their  just  debts. 

SUMMARY 

1.  Interest  is  the  reward  paid  for  the  use  of  capital. 

2.  Capital  differs  from  land  in  that  it  is  produced.     Social  capital 

consists  of  all  producers'  goods. 

3.  Speaking  generally,  interest  is  determined  by  the  relation  be- 

tween the  supply  of  capital  and  the  demand  for  it,  at  a 
point  or  rate  which  equalizes  the  supply  and  the  demand. 

4.  The  demand  for  capital  depends  upon  its  marginal  productive- 

ness, the  value  of  its  product. 

5.  The  supply  of  capital  depends  in  general  upon  its  cost  of  pro- 

duction, i.e.  upon  the  sacrifice  involved  in  postponement 
of  consumption  by  the  marginal  saver  or  investor. 

6.  The  cost  of  postponement  of  consumption  arises  from  the  fact 

that  men  regularly  value  more  highly  the  present  as  com- 
pared with  the  future,  and  the  cost  is  therefore  measured 
by  the  extent  of  this  higher  valuation. 

7.  The  same  difference  in  value  of  present  and  future  goods  ex- 

plains why  capital  is  "productive." 

8.  Capital  loans  should  be  distinguished  carefully  from  loans  of 

money. 

9.  The  interest  rate,  as  ordinarily  quoted,  really  measures  the 

return  for  risk  as   well  as  the  return  for  capital,  which  is 


356     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

pure  interest.  Both  gross  interest  and  pure  interest  tend 
to  fall  with  advancing  civilization. 
10.  During  periods  in  which  an  increase  of  money  and  credit 
results  in  a  steady  rise  in  general  prices,  the  rate  of  in- 
terest on  long-time  loans  rises  to  offset  loss  in  the  capital 
value  of  the  loan. 

QUESTIONS  FOR  RECITATION 

1.  What  are  the  differences  between  capital  and  land?     The 

resemblances  ? 

2.  What  is  interest?     How  was  the  taking  of  interest  regarded 

in  early  times? 

3.  What  is  the  supply  and  demand  theory  of  interest?     What  is 

the  marginal  productivity  theory?  What  element  of  truth 
does  it  contain?  What  is  the  abstinence  theory?  What 
element  of  truth  does  it  contain?  What  is  the  Austrian 
theory  ?    Are  these  theories  necessarily  contradictory  ? 

4.  State  in  summary  form  the  complete  theory  of  interest. 

5.  Is  it  right  to  say  that  the  cost  of  capital  is  abstinence?    What 

is  meant  by  marginal  investment?  How  do  relative  valua- 
tions of  present  and  future  compare  in  the  case  of  children 
and  adults?  Of  children  and  savages?  Of  rich  and  poor? 
What  relation  has  this  to  interest? 

6.  Show  in  detail  the  services  rendered  to  production  by  capital. 

7.  What  different  loan  markets  are  to  be  distinguished?     How 

is  the  "rent"  of  houses  determined? 

8.  What  two  elements  are  there  in  the  ordinary  interest  rate? 

What  is  pure  interest?  What  two  reasons  are  there  for 
a  fall  in  the  interest  rate  with  advancing  civilization? 

9.  What  is  usury?     What  are  usury  laws?     In  what  cases  are 

usury  laws  beneficial  ? 
10.   Why  has  the  interest  rate  on  bonds  risen  since  1900? 

QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  The  word  interest  is  of  Latin  origin.     What  is  its  original 

meaning? 

2.  Could  the  rent  of  an  acre  of  land  be  represented  as  interest? 

3.  What  would  be  the  effect  on  interest  of  an  instantaneous  dou- 

bling of  the  world's  capital!     Of  increasing  the  efficiency  of 
the  present  stock  of  capital  ? 

4.  Explain  the  differences  in  rates  of  interest  in  different  sections 

of  the  United  States. 


I 


INTEREST  357 

5.  If  the  present  product  of  industry  in  the  United  States  were 

more  evenly  distributed,  what  would  be  the  effect  upon  sav- 
ing? upon  productivity  of  capital?  upon  relative  values  of 
present  and  future  goods  ? 

6.  What  are  some  of  the  effects  of  war  on  capital  and  investment? 

LITERATURE 

See  list  of  works  cited  at  close  of  Chapters  II  and  III.     Also :  — 
Bohm-Bawerk,  E.  von:   Capital  and  Interest,  Translator's  Preface, 

pp.   xix-xx;    also   Positive    Theory    of   Capital,  Bk.  V,  Ch.  Ill, 

pp.  253-259. 
Clark,  J.  B. :    The  Distribution  of  Wealth,  Ch.  XII,  pp.  182-187. 
Walker,  F.  A. :   Political  Economy,  Pt.  IV,  Ch.  Ill,  pp.  218-232, 

and  Pt.  VI,  §  1. 
All  standard  works  on  Economics  disjcuss  these  topics. 


CHAPTER  V 
PROFITS 

Economists  recognize  a  fourth  regular  share  in  the  distri- 
bution of  the  social  income,  though  they  have  not  been 
agreed  as  to  precisely  how  it  is  determined.  The  name 
"  profits  "  is  commonly  used  to  denote  the  total  return  to 
the  entrepreneur  from  the  sale  of  his  product,  after  the  pay- 
ment of  wages  for  labor  employed  and  a  further  payment 
for  land  and  capital  hired.  It  is  evident,  however,  that  this 
return  is  not  a  simple  one,  but  contains  payments  for  several 
elements  that  call  for  separate  treatment.  We  shall  there- 
fore speak  of  this  return  as  gross  profits,  and  inquire  of  what  it 
consists,  thus  leading  the  way  to  an  understanding  of  the  net 
return  which  may  be  called,  by  contrast,  pure  or  net  profit. 

1.  Rewards  to  Other  Factors  of  Production. —  1.  Interest, 
—  In  the  first  place,  it  is  evident  that  the  return  which  the 
entrepreneur  receives  is  in  part  due  to  the  factors  of  pro- 
duction which  he  himself  owns  and  uses  in  the  business. 
The  return  to  his  capital  invested  is  really  interest,  as  truly 
as  if  it  were  to  be  paid  to  another  person  who  owned  the 
capital  instead  of  to  the  entrepreneur  owner  himself.  In 
estimating  net  profits,  therefore,  careful  bookkeeping  will 
deduct  from  gross  profits  interest  on  capital  invested  by  the 
entrepreneur. 

2.  Rent.  —  The  same  thing,  of  course,  holds  true  of  land 
owned  by  the  entrepreneur.  Rent  should  be  charged  oflf  in 
the  same  way  as  to  an  outside  owner. 

358 


PROFITS  359 

3.  Wages,  Including  Wages  of  Superintendence.  —  The  ele- 
ment of  wages  and  salaries  of  every  sort,  including  a  regvr 
larly  estimated  amount  for  the  entrepreneur  himself,  should  also 
for  scientific  purposes  be  separated  from  gross  profits  in  the 
calculation  of  net  profits.  Private  and  public  corporations 
do  this  regularly,  and  the  practice  is  frequent  in  those  large 
non-corporate  businesses  in  which  the  entrepreneur  is  em- 
ployed just  as  is  any  other  laborer. 

II.  Charges  of  Maintenance.  —  1.  Replacement  Fund  or 
Depreciation  Charge.  —  In  the  second  place,  deduction  must 
be  madelPronT^^ss  profits  of  a  sum  sufficient  to  provide  for 
the  maintenance  of  the  capital,  or  its  replacement,  as  it  is 
gradually  used  up,  or  as  it  is  suddenly  destroyed.  Modern 
business  bookkeeping  commonly  provides  for  the  replacement 
of  gradual  impairment  by  keeping  a  separate  account  for 
what  is  called  a  maintenance  fund.  A  man  is  facing  business 
ruin  who  takes  and  consumes  as  profits  from  his  plant  what 
should  be  set  aside  for  its  upkeep  and  replacement. 

2.  Insurance.  —  The  same  may  be  said  of  the  payment 
to  provide  against  risk,  which  may  be  called  insurance. 
The  amount  of  money  which  a  careful  business  man  sets 
aside  from  the  unusual  gains  of  prosperous  years  to  secure 
himself  against  disaster  from  losses  in  lean  years  is  not 
profit.  Insurance  in  this  sense  is  much  broader  than  insur- 
ance against  fire,  hail,  etc.,  for  which  a  poHcy  may  be  taken 
out  and  a  definite  premium  paid.  It  must  be  noticed  that 
when  a  separate  charge  is  made  to  cover  such  risk,  the  allow- 
ance for  interest  on  the  capital  must  leave  out  the  part  due 
to  risk  which  we  have  seen  to  be  present  in  gross  or  market 
interest ;  in  other  words,  the  interest  will  in  such  a  case  be 
the  pure  interest. 

III.  Extra-Personal  Gains.— 1.  Monopoly  Gains.  — Even 
with  all  these  deductions,  the  analysis  is  not  complete.     We 


360     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

must,  in  the  third  place,  deduct  extra-personal  gains,  — 
gains  which  are  not  due  to  the  eflBciency  of  the  manager. 
One  of  these  sources  of  gain  lies  in  the  possession  of  a  mo- 
nopoly advantage.  Monopoly  gains  are  a  separate  item  in 
distribution,  and  if  they  are  to  be  called  profits,  as  they 
frequently  are,  we  must  carefully  distinguish  the  particular 
nature  of  such  profits. 

2.  Conjunctural  Gains.  —  Closely  resembling  monopoly 
gains  in  certain  respects  is  a  class  of  gains  known  in  recent 
economic  discussion  as  conjunctural.  As  the  name  indicates, 
these  are  extra-personal  gains  resulting  from  a  favorable 
conjuncture  of  circumstances,  which  could  not  have  been  fore- 
seen. A  simple  instance  of  such  a  gain  is  seen  in  the  profits 
made  by  retail  dealers  when  the  sudden  death  of  a  great 
personage  creates  umisual  deinand  for_mourning^  goods. 
Stocks  of  black  goods  which  'tEe'inerchant  may  have  cen- 
sured  himself  for  accumulating  may  suddenly  become  the 
source  of  a  considerable  conjunctural  gain.  Here,  however, 
a  very  real  difficulty  presents  itself.  In  instances  hke  that 
just  mentioned,  the  conjunctural  element  can  be  plainly 
distinguished.  But  it  often  happens  that  such  gains  are  at 
least  in  part  the  reward  of  foresight  and  energy,  and  are 
therefore  to  be  classed  as  pure  or  net  profit.  The  man  who 
makes  a  fortune  by  buying  up  suburban  property  in  an  un- 
likely neighborhood,  because  he  has  had  sufficient  sagacity 
to  foresee  growth  of  population  in  that  direction,  may  claim 
with  some  reason  that  his  gain  is  not  conjunctural.  Even 
more  reasonable  would  his  claim  be  if,  after  buying  the 
property,  he  himself  directed  the  movement  of  population 
in  that  direction  by  securing  improved  rapid  transit  facili- 
ties and  by  other  familiar  expedients.  In  real  life  all  the 
stages  between  clever  business  foresight  and  pure  conjunc- 
ture are  to  be  observed. 


PROFITS 


361 


IV.  Pure  or  Net  Profits.  —  Our  analysis,  then,  gives  us 
as  our  concept  of  pure  or  net  profits  all  that  is  left  after 
deducting  the  items  mentioned.  Of  course  it  will  be  under- 
stood that  not  every  business  shows  in  its  gross  profits  all 
these  different  items.  Sometimes  it  may  even  happen  that 
there  need  be  no  further  deductions  than  those  for  wages 
and  a  maintenance  fund.  But  some  of  the  other  items  are 
usually  present  in  the  estimate  of  gross  profits. 

How  Net  or  Pure  Profit  is  Determined.  —  Society  must  at 
any  time  pay  for  its  goods  a  price  sufficient  to  give  even  the 
most  inefficient  manager  whose  services  are  necessary  to  the  pro- 
duction of  the  supply,  an  amount  covering  the  items  other  than 
net  profits.  But  no  pure  or  net  profits  will  accrue  to  such  a 
marginal  entrepreneur.  More  efficient  managers  will,  there- 
fore, be  able  to  secure  differential  profit,  the  amount  of  the  dif- 
ferential in  every  case  being  determined  by  the  extent  to  which  these 
entrepreneurs  individuxdly  surpass  in  efficiency  the  entrepreneur 
of  only  marginal  efficiency.  Pure  or  net  profit,  therefore,  is  a 
purely  personal  gain  —  a  return  to  superiority  of  management 
as  such,  independently  of  monopoly  advantage,  favorable  con- 
juncture, or  the  mere  labor  of  the  manager  as  a  superintendent. 

Summary.  —  Let  us  summarize  the  considerations  just 
presented :  — 


Gross  Profits 


Reward  to 
other  factors 
of  production 


Interest  on  entrepreneur's  capital. 
Rent  of  entrepreneur's  land. 
Wages  for  entrepreneur's  service. 


Charges  of         f  Replacement  fund, 
maintenance  t  insurance  fund. 

Extra-personal  f  Monopoly  gains, 
gains  I  Conjunctural  gains. 


Net  profit  — 
Personal  gains 


I  Differential  or  pure  profits. 


362     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Pure  Profit  and  Rent  Compared.  —  This  explanation  of 
the  determination  of  pure  profit  as  a  surplus  due  to  the  su- 
periority of  a  given  entrepreneur  over  the  marginal  or  poorest 
entrepreneur  who  can  afford  to  stay  in  business  at  the  cur- 
rent price  of  the  product,  is,  as  the  student  will  doubtless  have 
noticed,  strikingly  like  the  explanation  of  the  determination 
of  rent.  Thus,  while  wages  and  interest  are  price  determin- 
ing, entering  into  the  price  of  the  product,  rent  and  profits 
are  price  determined;  they  do  not  enter  into  the  price  of  the 
product.  Pure  profit  has  hence  been  called,  not  inaptly, 
personal  rent,  or  the  rent  of  managing  ability.  Again,  as 
with  rent,  it  is  interesting  to  notice  the  corollary  that  it  is 
not  the  able  managers,  receiving  large  pure  profit,  any  more 
than  the  fertile  land,  receiving  large  rent,  that  makes  the 
prices  of  commodities  high.  If  all  land  were  of  the  highest 
grade  of  fertility,  the  price  of  produce  would  be  lessened; 
and  in  the  same  way,  if  all  managers  were  of  the  same  order 
of  talent  as  our  ablest  managers,  goods  would  be  produced 
at  a  lower  marginal  expense,  and  society  would  reap  the 
benefit  in  lower  prices.  But  there  is  this  marked  difference 
between  the  rent  of  land  and  pure  profits.  The  more  fertile 
lands  can  exercise  little  influence  in  raising  the  quality  of 
inferior  soils,  while  superior  entrepreneurs  are  always  tend- 
ing to  make  the  knowledge  and  skill  requisite  for  success  a 
matter  of  common  property.  As  business  becomes  more 
completely  organized,  falling  more  and  more  into  routine; 
as  knowledge  becomes  more  widely  diffused  throughout  the 
business  community ;  and  as  governments  improve  in  regu- 
larity and  firmness  and  honesty,  the  marginal  expense  of 
production  and  the  resulting  prices  tend  to  fall,  and  profits 
in  consequence  tend  to  lower  and  lower  limits.  It  is  in  this 
sense  that  profits  may  be  spoken  of  as  ''  the  lure  that  insures 
improvement." 


PROFITS  363 

Pure  Profit  and  Monopoly  Gains  Contrasted.  —  Under 
sharp  and  increasing  competition,  pure  profit  rests  upon  a 
precarious  foundation.  If  the  special  abihty  upon  which 
the  profit  depends  is  such  as  cannot  be  duplicated,  the  profit 
will  perish  with  the  single  possessor;  if  the  special  ability 
can  be  duplicated,  rival  concerns  will  possess  themselves  of 
entrepreneurs  of  equal  eflSciency,  and  the  special  advantage 
tends  to  disappear  through  competition.  But,  as  we  have 
said,  there  are  certain  permanent  extra-personal  advantages, 
entirely  equivalent  otherwise  to  natural  ability,  which  may 
become  the  exclusive  and  permanent  property  of  a  t)usiness 
organization.  In  case  of  such  possession,  competition  is  ^ 
either  entirely  impossible  or  it  is  possible  only  on  terms 
which  give  to  the  holder  of  the  monopoly  advantage  a  con- 
siderable differential  return.  When  such  an  advantage  is 
enjoyed,  the  power  of  competition  over  price  is  removed; 
prices  no  longer  stand  at  the  point  of  cost;  and  a  surplus 
over  rent,  wages,  interest,  and  profits  is  a  regular  result. 
Unless  interfered  with  by  legislation,  there  could  be  no  out- 
side influence  to  prevent  a  monopoly  from  asking  any  price  it 
pleased,  subject  only  to  the  action  of  the  law  of  monopoly 
price  which  has  been  explained  in  the  chapter  on  Monopolies. 

Another  sharp  contrast  between  pure  profits  and  monopoly 
gains  lies  in  the  fact  that  whereas  pure  profit  is  a  surplus 
produced  by  superior  efficiency,  and  is  in  so  far  no  burden  to 
the  community,  —  which,  indeed,  tends  to  gain  by  it  in  the 
end,  —  monopoly  profit,  on  the  other  hand,  is  a  surplus 
extorted  by  power  and  privilege,  and  is  usually  a  source  of 
loss  to  the  community.  Distribution  of  wealth  is  coming 
increasingly  under  the  influence  of  monopoly.  The  eco- 
nomic surplus  taken  by  monopoly  is  the  source  of  many  of 
the  largest  fortunes' of  our  day,  and  is  one  of  the  main  causes 
of  the  growing  inequalities  of  fortune,  especially  since  our 


364     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Civil  War.  While,  in  general,  competition  increases  in 
severity,  an  increasing  proportion  of  the  industrial  field  is 
withdrawn  from  competition  and  falls  under  the  ccmtrol  of 
monopoly. 

In  passing  judgment  on  big  business  today,  therefore, 
it  is  most  important  to  discover  whether  the  size  of  the 
business  and  of  its  profits  is  due  to  some  monopoly  advantage 
or  advantages,  or  whether  it  is  due  simply  to  the  unusual 
ability  of  its  managers. 

Capital  and  Capitalization.  —  In  considering  monopoly 
gains,  it  is  important  to  understand  the  distinction  between 
capital  and  capitalization.  Capitalization  means  the  amount 
at  which  a  business  or  property  is  valued.  The  word  is  there- 
fore used  in  the  language  of  the  market  in  two  ways.  It  is 
sometimes  used  to  describe  the  par  value  of  the  stock  and 
other  securities  issued  by  the  company,  as  representing  the 
company's  nominal  valuxdion  of  the  business  and  its  earning 
power.  The  word  is  also  used  to  denote  the  market  value 
of  the  business  or  of  its  securities  taken  as  a  whole.  Thus  a 
company  may  be  capitaHzed  at  $10,000,000  in  the  sense  that 
its  securities  have  that  par  value,  while  the  market  estimate 
of  the  value  of  the  business,  as  reflected  in  the  prices  paid 
for  its  securities,  may  be  much  less  or  much  more  than 
$10,000,000.  Capitalization  in  either  of  these  two  senses 
may  be  many  times  the  amount  of  capital  actually  invested, 
since  it  is  basied,  not  on  investment  or  material  cost,  but  upon 
earning  pow^r. 

When  we  speak  of  current  interest  as  being  5  per  cent,  we 
mean  that  free  and  disposable  capital  can  regularly  command 
that  rate  of  return  in  competitive  industry.  Let  us  suppose 
that  the  return  on  equally  safe  investments  that  are  open 
to  all  is  about  5  per  cent,  while  the  annual  return  to  a  great 
oil  company,  which  has  actually  invested  $100,000,000  in 


PROFITS  365 

the  business,  is  50  per  cent.  The  business  may  in  that  case 
be  capitaHzed  at  $1,000,000,000,  in  such  a  way  that  the  great 
earnings  on  the  actital  investment  will  appear  as  only  5  per 
cent  on  the  capitalization.  To  those  who  are  ignorant  of  the 
difference  between  capital  and  capitalization,  monopolies 
can  often,  by  such  a  plan  as  this,  appeal  successfully  for 
sympathy  and  support  on  the  ground  of  insuflScient  earnings, 
even  when  the  return  on  their  actual  investment  is  many 
times  the  market  rate. 

As  profits  on  new  investments  in  competitive  industries 
fall,  the  capitalization  of  monopoly  earnings  may  Ee  raised 
in  propofCt(fStt,  even  without  the  investment  of  new  capital. 
For  instance,  if  a  monopoly  has  an  earning  power  of  $50,000 
a  year,  the  capitalization  of  this  return  at  5  per  cent  would 
stand  at  $1,000,000.  If,  then,  the  current  rate  of  interest 
should  fall  to  4  per  cent,  while  the  monopoly  earnings  suffered 
no  change,  the  capitalization  of  the  monopoly,  represented 
by  the  market  value  of  its  securities,  would  rise  to  $1,250,000. 

And  yet  it  must  be  remembered  that  the  owners  of  the 
stock  of  monopolistic  businesses  often  include  many  persons 
who  have  paid  on  the  basis  of  the  capitalized  value,  and  who 
do  not  therefore  receive  from  the  monopoly  a  greater  return 
than  they  would  receive  from  investments  in  competitive 
industry.  It  is  those  who  "get  in  on  the  ground  floor," 
and  who  are  thus  enabled  to  sell  at  the  capitalized  value 
stock  which  they  have  received  on  the  basis  of  actual  invest- 
ment, who  divide  among  them  the  capitalized  monopoly 
earnings. 

SUMMARY 

1.  The  word  "profits'*  as  ordinarily  used  in  business  often  includes 
many  elements  of  income  which  are  not  really  profits.  The 
total  surplus  left  in  the  employer's  hands  after  the  payment 
of  contract  wages,  rent,  and  interest  should  be  called  gross 
profits.  '  " 


366     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

2.  To  obtain  the  net  profits  of  a  business  there  must  be  subtracted 

from  the  gross  profits  (1)  a  normal  return  for  the  employer's 
own  capital,  land,  and  services,  i.e.  interest,  rent,  and  wages 
of  superintendence;  (2)  charges  of  maintenance,  including 
funds  for  replacement  and  insurance;  (3)  extra-personal 
gains,  including  those  arising  from  monopoly  and  from  chance. 

3.  The  remainder,  or  the  pure  net  profit,  is  a  differential  return 

due  to  the  superior  ability  of  the  entrepreneur,  and  is  in 
many  respects  similar  to  rent. 

4.  Pure  profits  tend  to  diminish,  other  things  being  equal,  as 

education  becomes  more  widely  diffused  and  as  industry 
becomes  more  completely  organized  under  regular  routine. 

5.  Monopoly  profits,  on  the  other  hand,  have  a  more  permanent 

character  in  the  absence  of  government  interference. 

6.  Under  modern  conditions  of  business,   monopoly  profits  are 

often  disguised  by  their  form  of  capitalization. 

QUESTIONS  FOR  RECITATION 

1.  What  are  gross  profits?    What  is  the  difference  between  gross 

profits  and  pure  profits? 

2.  Name  the  deductions  that  must  be  made  from  gross  profits  to 

arrive  at  net  profits. 

3.  What  is  the  replacement  fund  ?    Insurance  fund  ? 

4.  What  are  the  two  classes  of  extra-personal  gains?     What  is 

meant  by  the  word  "  conjunctural "  ?  Mention  instances  of 
conjunctural  gains  that  have  faUen  under  your  observation 
or  that  you  have  met  with  in  reading. 

5.  What  caution  must  be  observed  in  estimating  conjunctural 

profits? 

6.  Why  are  pure  profits  like  rent?     How  do  pure  profits  and  rent 

compare  as  to  their  tendency  to  increase  or  decrease?  What 
effect  does  competition  have  in  the  long  run  on  pure  profits? 
On  monopoly  profits  ? 

7.  Why  is  it  that  monopoly  profits  often  appear  to  be  only  equal 

to  the  normal  interest  rate?  What  bearing  does  this  have 
upon  popular  opinion  regarding  monopolies  ? 

8.  What   is   the   difference   between   capital   and   capitalization? 

Explain  the  process  of  capitalization. 

9.  What  is  the  effect  of  a  falling  interest  rate  upon  the  capitalized 

value  of  a  monopoly  privilege? 


PROFITS  367 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  What   effects   upon   profits   are  to   be   expected  from   general 

education?  from  industrial  education?  from  the  develop- 
melit  of  trade  publications? 

2.  Trace  the  resemblance  between  profits  and  wages  in  the  case  of 

a  great  singer. 

3.  How  far  is  it  possible  to  discover  the  several  distributive  shares 

in  the  financial  statement  of  a  railway  or  industrial  corporation  ? 

4.  If  industrial  change  and  progress  were  to  stop,  would  profits  be 

affected  ? 

5.  What   are  some  of  the  different  ways  in  which  the  superior 

entrepreneur  may  manifest  his  superiority?  If  an  entre- 
preneur who  excels  in  marketing  his  product  unites  "with  an 
entrepreneur  who  excels  in  factory  management,  what 
results  may  be  expected  ? 

LITERATURE 

See  note  on  literature  at  close  of  preceding  chapter.    Also : — 

Ely,  R.  T. :   Monopolies  and  Trusts,  Ch.  III. 

Jenks,  J.  W. :   The  Trust  Problem. 

Meade,  E.  S. :   Trust  Finance. 

Report  of  the  United  States  Industrial  Commission,  Vol.  XIX, 

pp.  724-730. 
Taussig,  F.  W. :   Principles  of  Political  Economy. 
Walker,  F.  A. :   Principles  of  Political  Economy. 


CHAPTER  VI 
SOCIALISM 

The  Relation  of  Socialism  to  Distribution.  —  In  the  pre- 
ceding chapters  we  have  explained  how  in  the  existing  social 
organization  the  annual  produce  of  industry  —  the  social 
income  —  is  distributed.  As  we  stated  at  the  outset,  the 
method  of  distribution  is  intimately  connected  with  the  legal 
structure  of  society,  and  particularly  with  the  laws  of 
property.  Society,  as  it  exists  in  all  advanced  nations, 
accepts  private  property  as  its  economic  basis.  In  other 
words,  in  the  great  majority  of  goods,  private  proprietorship 
or  private  appropriation  is  not  only  permitted  but  encour- 
aged, and  the  result  is  the  system  of  distribution  which  has 
been  described. 

There  are  considerable  differences  in  the  laws  about 
property  observed  by  different  nations,  and  minor  changes  are 
constantly  being  made;  and  these  differences  and  changes 
result  in  corresponding  differences  and  changes  in  distribu- 
tion. It  would  take  us  too  far  afield  to  attempt  to  treat  of 
them  in  detail.  But  socialism,  which  may  be  described  as 
a  plan  for  changing  the  very  foundation  of  our  economic^ 
organization,  has  been  proposed  and  discussed  so  seriously, 
and  commands  to-day  so  many  enthusiastic  advocates,  that 
we  cannot  pass  it  by  in  silence  in  our  analysis  of  economic 
theory. 

Such  a  fundamental  change  as  socialists  propose  would, 
we  shall  see  in  the  following  pages,  profoundly  affect  every 

368 


SOCIALISM 


^r^^ 

^^A^ 
H 

iy^ 


one  of  the  four  phases  of  economic  activity  which  we  have 
chosen  as  the  natural  divisions  of  economic  analysis,  —  con 
sumption,  production,  exchange,  and  distribution.  B 
socialism  has  been  put  forward  more  particularly  as  a  remedy 
for  exisiing  evils  in  the  distribution  of  the  social  income,  and 
we  may  therefore  treat  the  subject  properly  under  that  head. 
It  may  be  noted  in  passing,  moreover,  that  in  general  dis- 
cussions of  the  proposed  change  it  is  commonly  assumed  that 
labor  and  wages  would  be  especially  affected,  and  sociaHsm 
is  therefore  often  handled  in  direct  connection  with  the  sub- 
ject of  wages  and  plans  for  improving  the  status  of  labor. 

General  Characteristics.  —  We  have  already  described 
some  of  the  various  changes  in  the  relation  of  the  laborer 
to  the  product  of  his  labor  that  have  been  tried  or  put  for- 
ward. It  has  been  pointed  out  that  one  of  these  plans, 
cooperation,  may  be  either  voluntary  or  coercive,  —  that 
is,  ordered  and  controlled  by  the  state.  Now  coercive 
cooperation  is  but  another  name  for  socialism.  What,  then, 
is  socialism  ?  It  is,  in  fact,  coercive  or  compulsory  coopera- 
tion, not  merely  in  undertakings  of  a  monopolistic  nature, 
but  in  all  important  productive  enterprises.  Socialists  seek 
the  establishment  of  industrial  democracy  through  the  agency 
of  the  stajte,  which  they  hold  to  be  the  only  instrument  for 
accomplishing  their  end.  They  would  expand  the  business 
functions  of  government  until  all  dominant  kinds  of  busi- 
ness are  absorbed.  They  would  have  all  such  business  regu- 
lated by  the  people  in  their  organic  capacity,  every  man  and 
every  woman  having  essentially  the  same  rights  as  any  other 
man  or  woman.  Our  political  organization  would  become 
also  an  industrial  organization,  with  universal  suffrage. 
Private  property  in  profit-producing  business  and  rent- 
producing  land  would  be  abolished,  although  private  property 
in  incomes  would  be  in  the  main  preserved.  What  is  desired 
2b 


370     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

by  the  socialist,  then,  is  not,  as  is  supposed  by  the  unin- 
formed, a  division  or  diffusion  of  property,  but  rather  an 
increased  concentration  of  a  very  large  part  of  property. 
The  socialists  do  not  complain  that  productive  property  is 
concentrated  too  much,  but  they  object  that  it  is  not  yet 
sufficiently  concentrated.  They  therefore  rejoice  in  the 
formation  of  trusts  and  combinations,  regarding  them  as  a 
development  in  the  desired  direction. 

The  Four  Elements  of  Socialism.  —  There  are  four  char- 
acteristic features  of  pure  socialism:  first,  the  common 
ownership  of  the  means  of  production;  second,  the  common 
management  of  the  means  of  production;  third,  the  distribu- 
tion of  the  product  of  industry  by  common  authority;  fourth, 
private  property  in  the  greater  part  of  income.  Socialists  make 
no  war  on  capital,  strictly  speaking.  What  socialists  object 
to  is  not  capital,  but  the  private  capitalist.  They  desire  to 
socialize  capital  and  to  abolish  capitalists  as  a  distinct  class 
by  making  everybody,  as  a  member  of  the  community,  a 
capitalist ;  that  is,  a  joint  owner  of  substantially  the  whole 
of  the  capital  in  the  country. 

In  support  of  this  plan,  socialists  generally  claim  that  labor 
creates  all  wealth.  No  rational  socialist  means  by  this  to 
deny  that  land  and  capital  are  factors  or  agents  of  produc- 
tion ;  but,  as  they  are  only  passive  factors,  the  socialist  holds 
that  their  owners  should  not  receive  a  share  of  the  product 
simply  through  such  ownership.  Man  is  the  only  active 
agent,  and  all  production  is  conducted  for  the  sake  of  man. 
SociaHsts  admit  that,  with  industry  organized  as  it  is  now, 
the  owners  of  land  and  capital  must  receive  a  return ;  and 
hence  they  desire  that  these  tools  should  become  social 
property. 

Distributive  Justice.  —  The  central  aim  of  socialism,  its 
pivotal  point,  is  distributive  justice.    While  it  seeks  to  in- 


SOCIALISM  371 

crease  production  by  more  efficient  organization  and  better 
methods,  its  leading  thought  is  the  just  distribution  of  the 
product.  The  ideas  of  sociaHsts  on  the  question  of  what 
constitutes  justice  in  distribution  are  not  harmonious. 
Some  say  that  (1)  equality  meets  the  claims  of  justice ;  others 
urge  (2)  distribution  in  proportion  to  real  needs,  so  that  each 
man  may  have  the  economic  means  for  his  fullest  develop- 
ment; while  yet  others  say  that  justice  demands  distribu- 
tion (3)  in  proportion  to  merit  or  service  rendered  —  but  that 
the  service  mu^t  be  that  of  the  individual,  not  of  his  ancestors. 
Socialism  an  Extension  of  Existing  Institutions.  —  The 
English  government  now  monopolizes  the  postal  service,  the 
telegraph,  and  the  telephone ;  nearly  all  governments,  local 
or  central,  control  the  roads ;  some  own  canals  and  railways ; 
many  even  possess  factories  of  various  kinds,  and  probably 
every  national  government  does  at  least  a  little  manufactur- 
ing; many  of  them  also  plant  forests,  and  some  cultivate 
arable  land.  We  have  already  seen  that  governments 
already  touch  the  business  world  in  the  following  ways: 
(1)  they  protect  person  and  property;  (2)  they  create  and 
guarantee  certain  special  privileges;  (3)  they  regulate  the  terms 
of  contract  and  of  competition;  (4)  they  participate  in  privqte 
enterprises  by  favorable  tariffs,  bounties,  subsidies,  etc.;  (5)  th^y 
carry  on  certain  industrial  processes,  such  as  the  construction 
and  maintenance  of  roads,  parks,  lighthouses,  telegraphs, 
coins,  etc.  To  picture  to  ourselves  sociaUsm  pure  and 
simple,  therefore,  we  have  only  to  imagine  an  extension  of 
what  exists  already  until  a  point  is  reached  where  society, 
through  its  government,  cultivates  the  land,  manufactures 
the  goods,  conducts  the  exchanges,  and  in  short  prosecutes 
most  productive  enterprises.  Such  private  industry  alone 
would  be  permitted  as  would  not  threaten  the  dominating 
power  of  society  in  production  and  in  distribution.    Thus 


372     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

individuals  would  probably  be  allowed  to  cultivate  small 
areas  of  land,  and,  here  and  there,  there  might  perhaps  exist 
a  private  printing-press  supported  from  private  income. 

Not  All  Public  Business  is  Socialistic.  —  It  must  be  ob- 
served that  it  is  not  every  public  activity  in  relation  to  in- 
dustry which  is  socialistic. — Propcrlu  flrmkirto^  ihntjmly  can 
be  considered  socialistic  which  tends  to  render  govermtient 
dominant  ihrougkout  production.  Does  any  proposed  meas- 
ure tend  to  the  suppression  of  production  by  individuals 
or  by  voluntary  cooperation,  and  to  its  absorption  by  the 
government?  Then  it  is  socialistic;  otherwise  it  is  not. 
This  is  the  only  way  to  distinguish  between  socialistic  and 
nonsocialistic,  or  even  antisocialistic  measures.  It  fur- 
nishes us  with  a  rational  ground  for  judgment.  Are  com- 
pulsory education  and  free  schools  socialistic?  By  our  test 
they  are  decidedly  antisocialistic.  By  developing  capacity 
for  self-help  they  enable  those  who  grow  up  under  their 
influence  to  make  the  best  of  existing  institutions.  They 
are,  indeed,  a  conservative  force.  Is  municipal  ownership 
of  gas  works,  electric-Ughting  works,  or  other  natural  monop- 
olies, socialistic?  No;  for  they  accord  with  the  modern 
tendency  to  separate  sharply  the  proper  industrial  functions 
of  private  persons  from  the  proper  industrial  functions  of  the 
organized  community.  There  is  a  sound  principle  —  not 
socialistic  —  underlying  the  modern  tendency.  The  con- 
viction is  gradually  being  forced  both  by  theory  and  by 
experience  that  most  of  those  industries  which  are  natural 
monopolies  will  in  the  end  be  owned  and  worked  by  govern- 
ments, and  that  outside  the  field  of  natural  monopoly  there 
is  a  territory  sharply  defined  in  which  business  can  flourish 
only  in  the  atmosphere  of  private  enterprise  and  competition. 
If  we  separate  thus  frankly  and  rationally  the  private  from 
the  public  industrial  sphere,  we  lay  firmly  the  strongest 


SOCIALISM  373 

possible  foundation  for  the  existing  industrial  order,  in- 
stead of  allowing  men  to  drift  haphazard  into  socialism  or 
chaos. 

Socialism  makes  perhaps  its  most  powerful  claim  when  it 
pleads,  first,  for  a  scientific  organization  of  the  'productive 
forces  of  society,  and  second,  for  a  just  distribution  of  the 
social  income  from  production. 

1.  The  Relation  of  Socialism  to  Production.  — When  the 
opponent  of  socialism  objects  to  that  system  on  the  ground 
that  an  equal  division  of  the  social  income  would  result 
in  portions  pitifully  small  for  each  individual,  the  socialist 
replies :  "  There  is  little  to  divide  now,  naturally  enough. 
Competition  is  wasteful.  Two  railways  run  where,  one 
would  be  enough.  Three  times  as  many  milk  wagons, 
horses,  and  drivers  are  required  to  serve  the  people  with 
milk  as  would  amply  suffice  if  the  business  were  organized 
on  the  plan  of  the  distribution  of  letters  and  parcels.  Look 
at  the  shops,  wholesale  and  retail,  and  note  the  waste  of 
human  force.  Millions  of  dollars  are  expended  annually  in 
advertising,  and  this  sum  would  be  saved  in  the  socialistic 
state.  Without  competition  the  whole  dry  goods  and  grocery 
business  could  be  conducted  with  a  third  of  the  present  ex- 
penditure of  economic  energy.  Reflect,  too,  on  all  the  idle 
classes  in  society,  both  the  idle  rich  and  the  idle  poor.  Social- 
ism would  find  a  place  for  every  man,  and  would  put  all  into 
their  proper  place,  and  by  making  each  dependent  on  his 
own  exertions  for  success,  would  stimulate  our  energies." 
The  socialistic  argument,  continued  indefinitely  in  this  strain, 
is  telling.  It  does  not  prove  the  point,  however,  unless  we 
grant  three  assumptions :  first,  that  present  waste  and  idle- 
ness cannot  be  suppressed  altogether  or  diminished  greatly 
without  departing  from  the  fundamental  principles  of  our 
existing  order ;  second,  that  in  the  advantages  of  competition 


374     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

there  are  not  social  gains  which  more  than  oiUweigh  the  social 
losses  just  described;  and  third,  that  socialism  is  practicahle. 

2.  The  Relation  of  Socialism  to  Distribution.  —  Distrihvr 
tive  jvMice  advances  also  a  strong  plea  for  the  adoption  of  the 
program  of  socialism.  It  cannot  be  claimed  for  a  moment 
that  every  man's  income  is  now  adjusted  to  his  social  service. 
An  income  proportioned  to  desert  appeals  to  a  sense  of  right 
and  fitness;  but  cannot  we  approach  more  closely  to  that 
ideal  than  at  present  through  social  reform,  without  going 
to  the  extreme  of  social  reorganization?  No  doubt  the  idle 
man  is  morally  a  thief.  He  receives,  but  in  return  he  gives  no 
personal  effort.  Any  man  who  has  not  earned  the  right  of 
repose  by  his  own  past  services,  with  fruitful  physical  or 
mental  toil,  is  a  shameless  cumberer  of  the  earth,  unless,  in- 
deed, he  is  incapacitated  for  useful  employment. 

Social  Obligations  of  Wealth.  —  We  may  derive  hope 
from  the  fact  that  men  everywhere  are  coming  now  to  recog- 
nize the  social  obligations  resting  on  the  individual.  Dr. 
James  Fraser,  late  Bishop  of  Manchester,  expressed  the  idea 
in  words  the  essential  thought  of  which  is  this :  "  Most  of 
us  are  compelled  by  our  necessities  to  render  service  to  our 
fellows.  Some  of  us,  however,  have  inherited  or  received 
money  in  some  way  without  a  return  on  our  part.  We  are 
placed  by  God  on  our  honour.  It  becomes  a  matter,  not  of 
physical  compulsion,  but  of  honour  for  us  to  serve  our  fel- 
lows." What  is  here  said  would  apply  also  to  those  who 
become  wealthy  through  the  accidental  discovery  of  valu- 
able treasures,  such  as  oil,  natural  gas,  or  gold  on  or  under 
the  soil  which  they  own,  or  through  the  growth  of  cities, 
which  adds  immensely  to  the  value  of  favored  land.  Were 
you  to  receive  an  accession  of  wealth  in  such  a  way,  the 
wealth  would  be  yours  in  the  eyes  of  the  law,  but  morally  it 
would  be  simply  a  new  opportunity  for  helping  the  progress 


SOCIALISM  375 

of  humanity.  It  is  the  clear  realization  of  this  idea  that 
leads  men  of  wealth,  especially  in  America,  to  endow  so 
generously  universities  and  other  institutions  for  the  public 
welfare.  This  idea  is  contained  in  the  epigram,  now  famous, 
of  one  of  our  richest  manufacturers,  "  To  die  rich  is  to  die 
disgraced." 

3  and  4.  The  Relation  of  Socialism  to  Exchange  and  Ccm' 
sumption.  —  We  cannot  find  the  space  necessary  to  discuss 
all  the  economic  changes  that  would  appear  in  a  sociaHstic 
state.  It  must  suffice  merely  to  note  that  exchange  and 
consumption,  as  well  as  production  and  distribution,  would 
be  revolutionized.  A  credit  economy  might  supersede  en- 
tirely our  present  mixed  money  and  credit  economy,  and 
socialism,  to  be  consistent,  would  have  to  make  exchange 
values  accurately  proportionate  to  costs  in  human  labor  and 
in  other  sacrifice.  Moreover,  equitable  distribution  of  a 
product  largely  increased,  if  it  could  be  achieved,  would  of 
course  be  reflected  in  the  amount  and  character  of  the  goods 
consumed.  Particularly,  it  may  be  supposed  that  inclusive 
or  common,  as  contrasted  with  exclusive,  enjoyment  of 
wealth  would  fill  a  much  greater  place  in  the  life  of  a  people 
socialistically  organized. 

The  Weaknesses  of  Socialism.  —  In  considering  socialism 
as  a  scheme  for  social  reconstruction,  a  number  of  difficulties 
are  suggested.  Prominent  among  these  is  (1)  the  probable 
numbing  effect  of  the  system  upon  individual  initiative 
and  energy.  What  motive  to  activity  can  take  the  place  of 
the  desire  for  individual  and  family  advancement  through 
the  accumulation  of  private  property  ?  Another  very  grave 
difficulty  lies  in  (2)  the  introduction  of  the  requisite  unity  in 
the  organization  and  management  of  industry.  In  some  in- 
dustries where  the  work  is  of  a  routine  nature,  the  problem 
of  organization  may  not  be  impossible  of  solution.     But 


376     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

what  shall  we  say  of  such  industries  as  agriculture,  which 
has  hitherto  resisted  all  efforts  at  centralization?  In  the 
third  place,  (3)  the  socialist  state  would  have  the  herculean 
task  of  apportioning  work  of  all  conceivable  degrees  of  diffi- 
culty and  disagreeableness  among  the  workers.  How  could 
this  be  accomplished  without  engendering  a  universal  dis- 
content that  would  be  fatal  to  the  plan  at  its  first  inception  ? 

Again  (4)  the  danger  to  personal  freedom  under  the  pro- 
posed system  seems  very  real.  Up  to  a  certain  point,  it  is 
true,  government  seems  to  improve  as  its  functions  increase 
in  number  and  importance.  But  would  this  hold  true 
indefinitely?  We  may  even  grant,  for  argument's  sake, 
that,  as  our  very  livelihood  w^ould  depend  on  the  efficiency 
of  government,  all  the  force  and  energy  that  are  now  ex- 
pended in  private  service  would  be  diverted  into  public 
channels.  But  what  would  happen  if,  in  spite  of  all  pre- 
cautions, some  unscrupulous  combination  should  secure  con- 
trol of  the  state  ?  Would  there  remain,  inside  or  outside  of 
the  government,  standing  ground  for  effective,  yet  pacific, 
opposition?  It  is  to  be  feared  that  there  would  not.  Dis- 
satisfaction would  exist,  for  human  nature  is  such  that  man 
cannot  be  thoroughly  satisfied  with  his  surroundings.  The 
danger  is  that,  without  proper  means  for  its  expression,  this 
dissatisfaction  would  grow  and  spread  beneath  the  surface 
of  society,  until,  having  no  other  vent,  it  would  at  last  issue 
in  revolution. 

Finally,  we  may  lay  down  the  general  rule  that  (5)  the 
domination  of  a  single  industrial  principle  is  dangerous  to 
civilization.  Many  writers  have  pointed  out  that  it  was  the 
dominance  of  a  single  social  principle  that  led  to  the  down- 
fall of  the  old  civilizations.  What  is  needed  is  a  coordina- 
tion of  the  two  principles,  —  the  principle  of  private  and  of 
public  business.     It  is  desirable  that  some  should  serve  the 


SOCIALISM  377 

public  in  an  official  capacity,  for  some  men  are  specially 
adapted  for  that  work;  but  it  is  equally  desirable  that  an 
ample  field  should  be  left  for  those  who  prefer  private  initia- 
tive and  activity.  Our  present  system,  much  as  it  may  need 
reform,  offers  opportunity  for  coordination  of  these  two 
principles;   socialism  would  not. 

But  it  is  as  difficult  to  predict  the  ways  in  which  sociaUsm 
would  fail  as  it  is  for  the  socialists  to  say  definitely  how  it 
would  work,  and  this  suggests  their  real  weakness:  they 
venture  to  forecast  the  course  of  economic  evolution  too  far 
in  advance.  Certainly  we  must  have  ideals  and  look  forward 
to  the  future,  but  we  are  unable  to  say  very  long  before- 
hand what  will  be  the  best  means  of  attaining  these  ideals. 
The  hope  that  a  juster  distribution  of  wealth  will  prevail, 
and  that  income  will  represent  more  and  more  fully  social 
service,  is  cherished  by  many  who  do  not  call  themselves 
socialists,  and  who  believe  it  wise  to  concentrate  their  efforts 
on  practicable  social  reform. 

Our  Debt  to  Socialists.  —  Socialists  have  rendered  society 
a  real  service  by  calling  attention  to  pressing  social  problems ; 
by  forcing  us  to  reflect  upon  the  condition  of  the  less  fortu- 
nate classes ;  by  quickening  our  consciences ;  by  helping  us 
to  form  the  habit,  not  yet  generally  acquired,  of  looking  at 
all  questions  from  the  standpoint  of  public  welfare  and  not 
merely  from  that  of  individual  gain ;  and  finally,  by  calling 
our  attention  to  the  industrial  functions  of  government, 
thus  leading  us  and  aiding  us  to  separate  rationally  the  sphere 
of  private  industry  from  that  of  public  business. 

Socialism  not  Anarchism.  —  Socialism  has  been  described 
as  industrial  democracy  established  and  controlled  by  govern- 
ment. It  is  evident,  therefore,  that  the  socialist  would  give 
to  government  the  greatest  possible  authority.  At  the  op- 
posite extreme  stands  a  proposed  system  which  is  strangely 


378     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

enough  often  confused  by  the  ignorant  with  socialism. 
Anarchism  ivovld  do  away  with  government  entirely^  leaving 
all  activity  to  individitals  acting  voluntarily;  socialism,  as  we 
have  seen,  would  lessen  the  sphere  of  individual  initiative, 
leaving  the  greater  part  of  industrial  activity  in  the  hands  of 
government.  In  the  main,  therefore,  anarchism  and  sociaHsm 
are  antithetical.  Yet  there  are  some  anarchists  who  believe 
that,  were  governments  abolished,  individuals  would  freely 
of  their  own  accord  form  cooperative  groups  which,  federated, 
would  manage  all  production.  Anarchy  is,  in  the  minds  of 
most  thinking  people,  inconceivable. 

Commtmism,  Socialism,  and  Collectivism.  —  Communism 
is  a  term  which  is  not  much  used  in  recent  writing.  In  the 
past  it  was  employed  to  designate  an  extreme  kind  of 
socialism.  Communism  required  equality  of  possessions 
and  of  income,  without  much  regard  to  X}}e.  matter  »f  the 
regulation  of  jirodnntiop-  Some  writers  have  used  the  word 
"  communism "  to  designate  violent  schemes  of  radical 
social  reforms  as  distinguished  from  the  more  peaceful  and 
conservative  plans  of  reconstruction,  which  they  intend  by 
the  name  socialism.  Yet  the  conomunistic  societies  in  the 
United  States  are  composed  of  peace  men,  who  do  not  believe 
in  war,  and  even  preach  nonresistance  to  aggression.  It  is 
as  well,  perhaps,  to  abandon  the  attempt  to  make  a  perma- 
nent distinction  between  communism  and  socialism,  by 
simply  discarding  the  word  "communism."  Collectivism  is 
a  name  which  many  socialists  of  recent  years  have  favored 
as  a  designation  of  their  program.  Sometimes  they  have 
chosen  the  term  in  order  to  escape  the  odium  which  in  past 
years  has  been  attached  to  the  older  word. 

Divisions  among  Socialists.  —  Socialism  is  not  only  a 
theory  of  society,  but  also  a  practical  program.  Socialists 
are  far  from  being  of  one  mind  as  to  what  ought  to  be  done 


SOCIALISM  379 

to  bring  about  socialism.  A  small  minority  of  them  believe 
that  the  advocacy  of  socialism  through  the  medium  of  the 
written  and  spoken  word  is  sufficient.  To  that  group  belong 
many  of  the  Christian  Socialists,  who  base  their  argument 
and  their  hope  upon  the  Christian  Gospel.  Another  minor- 
ity, probably  somewhat  larger  than  the  former,  while  holding 
that  socialists  should  actively  participate  in  politics,  favor 
action  through  any  progressive  party,  especially  if  it  is  a 
labor  party.  Such  are  the  Fabian  Socialists  in  England, 
who  have  adopted  as  their  rule  of  action  "  Make  Haste 
Slowly."  But  the  preponderant  majority  of  socialists 
believe  that  socialists  ought  always  to  form  a  distinctive 
party  of  their  own  with  a  clear-cut  socialist  program. 

Yet  even  among  the  political  socialists  the^  has  arisen, 
during  the  past  fifteen  years,  a  strong  divergence  of  opinion. 
The  more  radical  of  them  minimize  the  importance  of  imme- 
diate betterment  of  the  condition  of  the  wage  earner,  and 
look  to  the  enactment^of  the  full  socialist  pr^ram  as 
being  by  far  the  most  important  aim  worth  striving  for,  even 
though  it  might  not  be  achieved  for  many  years  to  come. 
These  socialists  designate  themselves  as  Marxists,  or 
Scientific  Socialists,  and  are  more  or  less  literal  followers  of 
Karl  Marx,  who  in  his  large  work.  Capital,  tried  to  show  that 
socialism  is  destined  to  arrive  in  its  time,  through  the  evolu- 
tion of  the  great  underlying  forces  in  industrial  society, 
namely,  the  concentration  of  capital  in  a  few  hands  and  the 
growing  misery  of  the  working  class  under  the  capitalist 
system.  The  other  faction,  the  Revisionists,  question  the 
correctness  of  the  Marxian  forecast  and  prefer  to  work  for 
legislation  which  will  immediately  improve  the  lot  of  the 
workingmen.  Notwithstanding  their  differences,  Revi- 
sionists and  Marxists  cooperate  in  the  same  political  party, 
which  generally,  but  notably  in  Germany,  is  known  as  the 


380     ELEMENTARY  PRINCIPLES  OP  ECONOMICS 

Social  Democratic  Party,  and  its  followers  as  Social  Demo- 
crats. Perhaps  the  larger  part  of  political  socialists  in 
Europe  and  America  are  still  Marxists. 

In  opposition  to  both  brands  of  political  socialism,  espe- 
cially the  Revisionists,  we  find  the  French  Syndicalists,  who 
maintain  that  no  political  party  is  capable  of  keeping  out 
corruption  from  its  midst,  who  believe  in  the  "  war  of  the 
classes  "  and  the  "general  strike,''  and  who  would  commit  the 
ownership  and  control  of  each  industry  to  the  workingmen 
organized  in  syndicates  or  trade  unions,  and  loosely  bound 
together  in  the  C.  G.  T.  (the  "  Confederation  Generale  du 
Travail  ").  Syndicalism  has  within  recent  years  spread 
rapidly  to  other  countries.  In  the  United  States,  it  is  repre- 
sented by  the  so-called  "  I.W.W.,"  i.e.  Industrial  Workers 
of  the  World. 

As  socialism  depends  for  its  success  upon  arousing  the 
emotions  of  the  masses  of  the  people,  it  meets  formidable 
rivals  in  both  nationalism  and  imperialism,  which  make 
their  appeal  to  another  set  of  powerful  emotions  that  sway 
the  modern  man,  namely,  the  desire  to  lift  one's  nation  above 
the  others  in  power  and  in  the  sphere  of  its  dominion. 

Present  Status  of  the  Socialist  Political  Movement.  — 
Socialism  as  a  general  political  movement  has  been  making 
rapid  strides  in  Europe  within  the  last  few  years.  It  is 
impossible  to  form  an  accurate  estimate  of  the  aggregate 
number  of  political  socialists  at  the  present  time,  but  certain 
figures  are  available  which  indicate  the  quick  growth  and 
present  status  of  the  party.  Thus  in  the  German  Empire 
the  number  of  votes  cast  for  socialist  candidates  for  the 
Reichstag  rose  in  the  sixteen  years,  1887  to  1903,  from  763,128 
to  3,011,114.  This  represents  a  change  from  10.1  per  cent 
to  31.7  per  cent  of  the  entire  vote  of  the  Empire.  In  1912 
the  figure  was  34.9  per  cent,  the  total  of  votes  was  4,250,329, 


f  .  SOCIALISM  381 

and,  though  the  actual  number  of  Social  Democratic  mem- 
bers of  the  Reichstag  was  only  110,  it  should  on  the  basis 
of  votes  cast  have  been  131.  Ninety-three  newspapers, 
with  a  circulation  of  1,800,000,  belonged  to  the  party  in  1914. 
In  Italy,  in  1913,  53  "  regular ''  socialists  were  elected  to 
Parliament  by  825,000  votes ;  in  Austria,  in  1911,  there  were 
82  socialist  members  of  the  Lower  House,  elected  by  over  a 
million  votes ;  and  in  Vienna  alone,  20  of  the  33  representa- 
tives were  socialists.  In  France,  in  the  election  of  1914, 102 
socialist  deputies  were  elected>  and  the  total  socialist  vote 
was  slightly  below  1,400,000 ;  but  the  fact  that  M.  MiBerand, 
a  socialist,  found  a  place  in  the  Cabinet  formed  in  1901,  and 
that  M.  Briand,  another  former  socialist,  became  Prime 
Minister  subsequently,  to  be  followed  at  a  later  date  by  M. 
Viviani,  is  perhaps  more  significant  than  many  figures.  In 
England,  where  large  parties  have  always  been  few  in  niunber, 
socialism  has  shown  a  tendency  to  avoid  the  ordinary  political 
channels.  The  same  is  true  of  the  United  States,  although 
in  recent  elections  sm-prising  gains  have  been  made  by  organ- 
ized socialists.  In  1912  the  total  socialist  vote  for  Presi- 
dent was  about  900,000 ;  but  in  1916  the  socialist  vote  for 
President  exceeded  600,000  only  slightly.  A  conservative 
estimate  of  the  total  socialist  vote  of  the  world  would  place 
it  probably  in  the  neighborhood  of  10,000,000.  We  should 
not  overlook  the  fact  that  many  who  vote  for  socialist  candi- 
dates do  so,  not  because  they  are  socialists,  but  because 
they  desire  to  express  in  a  most  telling  way  their  discontent 
with  existing  governments.  That  particularly  applies  to 
Germany. 

SUMMARY 

1.  Socialism  is  coercive  cooperation  in  production. 

2.  Socialists  would  permit  private  property  in  income,  but  not  in 

means  of  production. 


382     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

3.  Socialists  claim  that  labor  produces  all  wealth,  and  they  aim 

at  a  distribution  based  on  justice. 

4.  Socialism  is  but  an  extension  of  existing  institutions. 

5.  The  strength  of  socialism  lies  in  its  suggested  saving  of  waste, 

in  its  proposal  for  a  juster  distribution,  and  in  its  demand 
for  the  recognition  of  the  social  obligations  of  wealth. 

6.  Its  weakness  lies  in  its  requirement  of  impossible  human  virtues. 

7.  Anarchism  is  really  the  opposite  of  socialism. 

8.  There  are  many  differences  of  view  among  socialists,  these 

differences  giving  rise  to  distinct  names  for  the  different 
groups. 

9.  The  political  socialists  have  increased  rapidly  in  number  in 

Europe  during  recent  years. 

QUESTIONS  FOR  RECITATION 

1.  Define  socialism;    anarchism.     What  is   Christian   socialism? 

Evolutionary  socialism?     Fabian  socialism? 

2.  How  far  does  socialism  abolish  private  property  ? 

3.  What  effect  would  socialism,  if  successful,  have  on  production? 

On  distribution?     On  exchange?     On  consumption? 

4.  What  difficulties  stand  in  the  way  of  realization  of  socialism  ? 

5.  Why  is  it  not  right  to  say  of  every  public  interference  in  industry 

that  it  is  socialistic?     When  may  a  measure  be  called  social- 
istic? 

6.  What  is  the  origin  of  wealth  according  to  socialists?     Discuss 

this  claim. 

7.  Why  is  anarchism  not  feasible? 

QUESTIONS  FOR   STUDY  AND   DISCUSSION 

1.  Consider  carefully  possible  answers  to  the  question,  commonly 

directed  against  socialism  :  Who  would  do  the  "dirty  work"  ? 

2.  Discuss  the  argument  for  and  against  the  use  of  diamonds. 

3.  Discuss  the  possible  bearings  of  socialism  on  the  growth  of 

population. 

4.  Would  universal  education  to  the  twentieth  year  of  age  be 

socialism?     Would  it  bring  about  equality  of  income? 

5.  Would  abolition  of  the  right  of  inheritance  be  socialism? 

6.  Can  society  work  toward  equality  of  income  without  "taking 

from  those  who  have"? 

7.  Is  it  socially  and  x)olitically  desirable  that  there  should  be  a 

closer  approach  to  equality  of  income  than  is  the  case  to-day  ? 
Would  there  be  an  economic  gain? 


SOCIALISM  383 

8.  What  constitutional  changes  would  be  required  for  the  in- 

troduction of  socialism  in  the  United  States? 

9.  Study  conditions  in  your  own  neighborhood  and  consider  whether 

or  not,  as  to  wage-earners  and  others,  they  correspond  to  the 
allegations  of  the  socialists. 

10.  Name  prominent  poets  and  novelists  and  politicians  who  belong 

to  one  or  another  of  the  socialist  schools. 

LITERATURE 

Brooks,  J.  G. :    The  Social  Unrest,  Ch.  VIII. 

Ely,  R.  T. :  Property  and  Contract  in  their  Relations  to  the  Distribu- 
tion of  Wealth,  especially  Vol.  II,  Appendix  III,  pp.  823-852, 
Production,  Present  and  Future,  by  Dr.  W.  I.  Bling ;  and  also 
Socialism  and  Social  Reform. 

Enson,  E.  C.  K. :   Modern  Socialism. 

Kirkup,  E. :  Inquiry  into  Socialism^  and  History  of  Socialism. 

Marx,  Karl :  Capital. 

Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  II,  Ch.  I,  §§2,  3, 
and  4. 

Morley,  H.  (Editor) :   Ideal  Commonwealths. 

Rae,  J. :   Contemporary  Socialism. 

Spargo,  John:  Karl  Marx,  his  Life  and  Work;  also  numerous 
other  books  and  pamphlets. 

Walling,  William  English:  Socialism  as  It  Is,  Progressivism  and 
After,  and  also  Socialism  of  Today. 

Arguments  against  Socialism  are  found  in  nearly  all  standard  eco- 
nomic treatises,  e.g.  those  by  Marshall,  Taussig,  Seager, 
Seligman. 


BOOK   IV 
PUBLIC  FINANCE 

CHAPTER  I 
EXPENDITURE  AND   REVENUE 

Definition  of  Public  Finance.  —  Public  finance  is  the 
science,  or  the  branch  of  economics,  which  deals  with  the  rev- 
enues and  expenditures  of  government,  and  with  their  ad- 
ministration. The  name  must  be  carefully  distinguished 
from  private  finance,  which  deals  with  the  revenues  and 
expenditures  of  an  individual  or  a  private  business,  and  from 
corporation  finance,  which  deals  with  the  revenues  and 
expenditures  of  private  corporations.  The  student  is  also 
cautioned  against  referring  the  word,  as  is  often  mistakenly 
done,  to  the  subjects  of  money  and  banking,  which  belong  to 
another  part  of  economics. 

Early  treatises  in  English  economics  usually  had  no  special 
part  devoted  to  public  finance,  but  included  some  observa- 
tions on  taxation  in  the  treatment  of  other  general  topics. 
It  is  true  that  the  difficulty  of  sayiug  anything  satisfactory 
about  a  subject  so  vast,  within  the  scope  of  a  few  pages,  is 
a  serious  one  ;  yet  it  does  not  seem  scientifically  satisfactory 
to  pass  over  one  of  the  most  important  economic  topics, 
even  in  an  elementary  treatise.     We  shall  therefore  attempt 

384 


WAGES   AND   THE   LABOR   PROBLEM  337 

7.  Distinguish  between  arbitration  and  conciliation.     What  is  the 

present  status  of  the  question  of  compulsory  arbitration  ? 

8.  What  are  some  of  the  objects  that  should  be  obtained  through 

labor  legislation? 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  Is  an  explanation  of  why  ditch  diggers  get  low  wages  a  justi- 

fication of  the  social  and  economic  conditions  that  explain 
the  low  wages  ? 

2.  What  would  be  the  earnings  of  lawyers  or  physicians  if  all  men 

and  women  had  equal  opportunity  to  develop  knowledge 
and  skill  in  those  professions?  Is  an  hour's  work  of  a 
physician  "naturally"  more  valuable  than  an  hour's  work 
of  a  ditch  digger,  or  is  the  difference  in  value  due  to  the 
difference  in  the  supply  of  the  two  sorts  of  service?  Why  the 
difference  in  supply  ? 

3.  What  is  the  economic  effect  of  industrial  education?    WiU 

it  change  the  relative  supply  of  skilled  as  compared  with 
unskilled  labor?  Will  it  change  the  relation  as  between 
manual  work  and  professional  services? 

4.  How  has   Germany's  social  legislation  increased   Germany's 

industrial  efficiency  ?  Is  there  any  stronger  reason  for  social 
legislation  than  the  reason  that  it  "pays"?  What  is  the 
goal  of  social  economic  Ufe? 

5.  How  many  states  have  passed  compulsory  insurance  or  work- 

men's compensation  acts  ?  What  is  the  date  of  the  passage 
of  the  first  one  in  the  United  States? 

6.  How  much  does  the  United  States  pay  annually  in  war  pen- 

sions? Who  receive  the  pensions?  What  would  old-age 
pensions  on  the  EngUsh  scale  cost  in  this  country?  How 
far  would  the  recipients  be  the  same  as  those  now  receiving 
war  pensions? 

7.  Compare  the  merits  of  compulsory  investigation  and  com- 

pulsory arbitration  in  labor  disputes. 

8.  Ought  unions  to  be  required  by  law  to  incorporate? 

9.  What  is  a  boycott?  a  black  list?    What  is  sweating?  parasitic 

industry  ? 

LITERATURE 

The  literature  of  labor  in  the  United  States  is  so  voluminous 
that  any  brief  selection  is  unusually  difficult  and  embarrassing. 
The  attempt  is  made  here  to  give  at  least  one  good  title  for  each 
important  topic. 


338     ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

Adams  and  Sumner :   Labor  Problems. 

Ashley,  W.  J. :  The  Adjustment  of  Wages.  (Excellent  reference  for 
joint  agreements,  the  shding  scale,  and  the  tendency  of  em- 
ployers and  employees  to  organization.) 

Carleton,  F.  T. :   History  and  Problems  of  Organized  Labor. 

Clark,  L.  D. :    The  Law  of  the  Employment  of  Labor. 

Commons  and  Andrews :  Principles  of  Labor  Legislation. 

Ely,  R.  T. :  Studies  in  the  Evolution  of  Industrial  Society,  Bk.  II, 
Ch.  X. 

Fay,  C.  F. :   Codperation  at  Home  and  Abroad. 

Gilman,  N.  P. :   Profit-sharing. 

Groat,  G.  G. :  An  Introduction  to  the  Study  of  Organized  Labor  in 
America. 

Hoxie,  R.  J. :  Scientific  Management  and  Labor. 

Le  Rossignol,  J.  E. :  State  Socialism  in  New  Zealand. 

Lowell,  Josephine  Shaw  :    Industrial  Arbitration  and  Conciliation. 

Moore,  H.  L. :   Laws  of  Wages. 

Nearing,  Scott :   Wages  in  the  United  States. 

Reeves,  W.  P. :  State  Experiments  in  Australia  and  New  Zealand. 

Report  of  the  Industrial  Commission  (U.  S.),  1900-1901;  also 
Reports  of  the  Federal  Industrial  Relations  Commission,  1915- 
1916. 

Schloss,  D.  F. :   Methods  of  Industrial  Remuneration. 

Schoenhof,  J. :   The  Economy  of  High  Wages. 

Siegfried,  Andre :   Democracy  in  New  Zealand. 

Smith,  Adam :   Wealth  of  Nations,  Bk.  I,  Ch.  I. 

Stimson,  F.  J. :   Handbook  to  the  Labor  Law  of  the  United  States. 

Taylor,  F.  W. :    Principles  of  Scientific  Management. 

Webb,  Sidney  and  Beatrice  :  The  Case  for  the  Factory  Acts.  Indus- 
trial Democracy,  Pt.  II,  Ch.  I,  pp.  49-50;  and  A  History  of 
Trade-unionism. 


CHAPTER  IV 
INTEREST 

After  our  long  excursion  into  the  subject  of  labor  and  its 
reward,  it  may  be  well  for  us  to  pause  a  moment  and  place 
in  the  right  connection  what  is  to  follow.  It  should  be  re- 
called that  under  the  general  subject  of  distribution,  or  the 
division  of  the  social  income  among  the  factors  that  have 
worked  to  produce  it,  we  have  now  discussed  the  subject  of 
rent,  the  share  received  by  the  owners  of  land,  and  wages, 
the  share  received  by  labor.  We  come  now  in  regular  order 
to  a  discussion  of  the  share  apportioned  to  the  owners  of 
capital.  Land  and  labor,  in  their  broadest  sense,  are  the 
only  original  elements  in  production.  Of  course,  as  has  been 
explained,  land  includes  not  only  building  lots  and  farming 
land,  but  also  mines  and  rivers  and  fisheries,  and,  in  short, 
all  natural  and  unproduced  agencies  of  production  other  than 
labor.  Capital,  on  the  other  hand,  is  not  a  primary  or 
original  factor,  but  a  secondary  or  derived  one. 

Unlike  land,  capital  is  produced,  but  it  is  produced  for 
the  purpose  of  further  production.  In  fact,  we  may  define 
capital  as  the  produced  instruments  of  prodv^ition. 

How  Interest  is  Determined.  —  Interest  is  the  return  to 
capital.  By  what  law  is  its  amount  determined?  This 
question  has  been  continually  discussed  and  still  appears  to 
many  economists  an  unsettled  problem.  The  ancients  in 
general  denied  that  interest  rested  on  any  justifiable  founda- 
tion.   Aristotle  thought  it  unjust,  and  Cicero  classes  it  with 

339 


340     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

murder.  Throughout  the  Middle  Ages  it  was  condemned 
by  the  Church  and  prohibited  by  statute.  One  of  the  main 
reasons  for  this  attitude  is  found  in  the  fact  that  until  recent 
centuries  little  capital  was  lent  for  productive  purposes. 
Loans  were  usually  made  for  personal  consumption  and  for 
the  relief  of  the  distressed.  The  lender  could  not  have  used 
productively  the  amount  lent,  and  the  borrower  did  not 
desire  the  loan  for  productive  uses.  Despite  public  opinion 
and  the  law,  however,  the  taking  of  interest  continued  cus- 
tomary wherever  commerce  was  developed,  and  with  the 
industrial  awakening  in  the  modern  period  of  capitalism  it 
was,  of  course,  allowed  as  a  necessity. 

Being  allowed,  it  must  needs  be  justified,  and  the  explana- 
tions and  justifications  have  been  numerous  and  various. 
Earlier  economists  explained  the  laws  of  rent  and  wages,  and 
then  naively  concluded  that  capital  had  what  was  left. 
The  owner  of  capital  was  thus  made  the  "  residual  claimant  " 
in  distribution.  Others  have  thought  that  capital  and  land 
receive  returns  according  to  fixed  laws,  and  that  labor  is  the 
residual  claimant.  The  truth  seems  to  be  that  no  one  of  the 
three  is  a  residual  claimant,  but  that  each  receives  a  return 
determined  by  regular  laws.  What,  then,  shall  we  say  is  the 
special  law  by  which  interest  is  determined  ?  In  answering 
this  question,  we  shall  try  to  make  a  statement  of  the  case 
which  shall  reconcile  conflicting  theories,  at  the  same  time 
that  we  indicate  briefly  what  those  theories  are. 

Fallacious  Views  Regarding  Interest.  —  To  begin  \\ith,  let 
us  clear  the  ground  by  ridding  the  mind  of  certain  views  as  to 
interest  that  are  very  widely  held  and  that  stand  squarely 
across  the  path  leading  to  just  and  clear  views  on  the  subject. 

There  is  a  very  widespread  opinion  that  the  payment  of 
interest  to  individual  owners  of  capital  is  necessary  to  any 
accumulation  of  capital.    This  is  clearly  not  so.     If  society 


INTEREST  341 

were  to  take  over  and  manage  all  industry  or  the  greater 
part  of  industry,  it  could  create  and  maintain  the  needed 
capital  out  of  the  product  of  the  industry.  Society  as  a  whole 
would  in  that  case  postpone  possible  present  satisfactions  for 
the  purpose  of  easier  and  richer  satisfactions  from  the  result- 
ing capitalistic  production.  It  may  well  be  that  we  do  better 
to  leave  the  accumulation  of  capital  to  the  self-interest  of 
individuals,  but  we  have  no  right  to  think  or  to  assert  that 
capital  can  be  secured  in  no  other  way. 

Another  fallacy,  perhaps  as  widely  held,  and  even  more 
obstructive  to  just  views  of  capital  and  interest,  is  the  idea 
that  interest  is  fundamentally  an  amount  of  money  annually 
paid  for  the  use  of  some  larger  amount  of  money.  Of  course, 
on  the  surface  this  seems  to  be  true;  otherwise,  the  idea 
would  never  have  gained  credence.  But  a  little  reflection 
will  show  the  fallacy  and  the  harm  in  the  fallacy.  In  the 
first  place,  it  will  be  found  that  actual  money  is  rarely  lent, 
borrowed,  or  repaid.  What  is  transferred  is  control  of 
wealth,  —  some  form  of  purchasing  power.  As  has  been 
explained  in  an  earlier  chapter,  a  business  man  goes  to  his 
bank  and  sells  his  note,  secured  or  unsecured,  in  exchange  for 
a  deposit.  Against  this  deposit  he  draws  checks  at  need  to 
purchase  needed  goods,  and  especially  capital  in  various 
forms.  The  bank  pays  out  little  gold  or  silver.  In  so  far 
as  it  cannot  balance  checks  against  checks  and  so  avoid  pay- 
ment, it  pays  out  various  forms  of  notes  which  are  themselves 
merely  credit  instruments.  Thus  it  is  clear  that  when  men 
borrow,  they  do  not  usually  or  really  borrow  money  at  all, 
but  only  purchasing  power. 

But  again,  such  purchasing  power,  as  the  name  implies, 
is  not  the  real  purpose  or  end  of  the  borrowing.  Nearly  all 
borrowing  has  as  its  end  the  securing  of  capital,  —  real, 
physical,  capital  goods,  to  be  used  in  the  work  of  produc- 


342      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

tion.  If  it  were  just  as  convenient  to  supply  the  capital 
goods  in  the  first  instance,  the  business  man  would  rather 
have  it  so.  And  if  capital  could  be  so  lent  and  borrowed, 
men  could  not  have  fallen  into  certain  of  their  present  wrong 
views  of  interest. 

Probably  nine  persons  out  of  ten,  perhaps  ninety-nine 
persons  out  of  every  hundred,  beUeve  that  the  rate  of  interest 
depends  upon  the  amount  of  money.  We  have  already 
given  one  way  by  which  this  fallacy  may  be  detected,  but 
experience  gives  sufficient  warning  that  further  explanation 
is  required.  And  here  again  explanation  may  perhaps  best 
take  the  form  of  illustration. 

Assume  a  society  with  a  given  quantity  of  circulation 
medium,  —  and  with  a  given  quantity  of  capital  goods.  In 
this  society  John  Doe  is  thinking  of  buying  a  cow  for  his 
dairy.  At  the  actual  level  of  prices  he  calculates  how  much 
he  must  pay  for  "  keepmg  "  the  cow,  including  the  feed, 
dairyman's  wages,  etc.,  and  how  much  the  milk  and  other 
products  will  bring  in  the  market,  at  the  existing  price  level. 
If,  allowing  for  risk,  depreciation,  etc.,  he  calculates  that 
the  products  year  by  year  will  sell  for  $3  more  than  "  cost 
of  keep,"  he  can,  on  a  6  per  cent  basis,  afiPord  to  pay  $50 
for  the  cow.  And  if  the  current  interest  rate  is  6  i>er  cent, 
$50  will  be  the  normal  value  of  the  cow. 

Now  assume  that  this  quantity  of  money  is  doubled,  and 
that,  in  accordance  w^th  the  quantity  theory  of  money, 
prices  are  doubled,  what  will  be  the  result  ?  Doe  now  cal- 
culates as  before,  but  with  all  prices  doubled,  —  prices  of 
feed,  labor,  etc.,  on  the  one  side,  and  of  milk,  cream,  butter, 
etc.,  on  the  other.  And  by  the  same  calculation  as  be- 
fore, he  finds  now  a  surplus  of  86.  Clearly  then  he  can 
now  afford  to  pay  S6  a  year  for  the  amount  of  purchasing 
power  required  to  secure  his  possession  of  the  cow.     But 


INTEREST  343 

the  rate  of  interest  will  remain  unchanged,  both  because 
he  can  now  get  $100  of  purchasing  power  as  easily  as  he 
could  before  get  $50  of  such  power,  and  because  the  price 
of  the  cow  has  now  doubled  with  other  prices,  and  stands 
at  $100.  And  $6  is  6  per  cent  of  $100,  just  as  $3  is  6  per 
cent  of  $50. 

If  now  we  have  succeeded  in  banishing  forever  from  the 
mind  of  the  student  the  fallacy  that  the  interest  rate  is  a 
function  of  the  amount  of  money,  we  may  go  on  to  explain 
how  interest  really  is  determined. 

Demand  and  Supply.  —  In  the  first  place,  it  is  probable 
that  all  economists  would  agree  that  interest,  which  expresses 
the  annual  value  of  the  use  of  capital,  is  determined,  as  is 
all  value,  by  the  relation  between  the  demand  for  capital 
goods  and  the  supply  of  them.  Where  there  is  a  strong 
demand  for  a  limited  supply  of  such  goods,  the  marginal 
utility  of  the  capital  will  be  high,  and  the  capitalist  can  exact 
a  large  return  in  the  form  of  interest.  If  the  demand  for 
capital  be  slight  relatively  to  the  supply,  then  the  rate  of 
interest  will  be  low.  Manifestly,  however,  this  does  not 
carry  us  far  upon  our  way.  We  proceed  to  inquire  what  it  is 
that  determines  the  demand  and  supply. 

The  Productivity  Theory.  —  Investigation  of  the  demand 
for  capital  brings  us  to  one  theory  of  interest  which  has  been 
widely  accepted, —- the  "productivity  theory."  To  the 
older  economists,  who  regarded  most  economic  questions 
from  the  point  of  view  of  the  business  manager,  it  seemed 
sufficient  to  say  that  interest  is  paid  because  capital  is  pro- 
ductive, and  that  the  amount  of  interest  is  determined  by 
the  degree  of  productiveness.  From  the  side  of  demand  we 
may  agree  that  the  productivity  theory  does  give  us  an 
explanation  of  interest.  When  capital  is  very  productive 
there  will  be  a  great  demand  for  it. 


344     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  Marginal  Productivity  Theory.  —  In  recent  years  a 
development  of  the  productivity  theory  has  been  brilUantly 
advocated  and  widely  accepted.  The  theory  is  essentially 
an  application  of  the  marginal  utility  analysis  to  the  field  of 
distribution.  The  utility  of  capital  is  not  immediate,  as  in 
the  case  of  consumers'  goods,  but  intermediate.  We  use 
capital  not  to  eat  or  wear,  but  to  help  in  making  things  to 
eat  and  wear.  And  of  capital,  as  of  labor,  it  may  be  said 
that  the  more  there  is  of  it,  the  less  productive  will  any  part 
of  it  be,  for  two  reasons.  First,  if  capital  be  increased  while 
the  factor  with  which  it  cooperates  remains  unchanged  in 
quantity,  the  physical  product  will  not  increase  proportion- 
ately with  the  increase  of  capital.  Thus  if  a  thousand  work- 
men be  supplied  at  the  same  task  with  increasing  quantities 
of  implements  of  production,  they  will,  it  is  true,  continually 
increase  output,  but  not  in  proportion  with  the  increase  of 
their  equipment.  In  the  second  place,  the  increased  output 
will  have  a  less  marginal  utility.  Products  to-day  are  the 
results  of  widely  varying  combinations  of  labor  and  capital. 
Increasing  capital,  therefore,  by  increasing  output  according 
to  the  degree  in  which  capital  is  important  in  production, 
will  in  the  same  varying  degree  lower  the  exchange  values 
of  those  goods  as  compared  with  the  others.  Briefly,  then, 
it  may  be  stated  as  a  law  of  capital :  other  things  being  equal, 
every  increase  of  capital  results  in  a  lowering  of  its  marginal 
value  productivity.  Adherents  of  this  theory  go  on  to  add 
that  in  the  actual  world  capital  receives  in  interest  an  amount 
equal  to  its  marginal  productivity.  While  the  productivity 
theory,  and  still  more  the  marginal  productivity  theory,  may 
offer  for  some  purposes  a  good  way  of  explaining  why  men  can 
and  will  pay  interest,  it  does  not  explain  why  they  must  do  so. 

The  Abstinence  Theory.  —  To  understand  why  interest 
must  be  paid,  we  have  to  investigate  the  subject  of  the  supply 


INTEREST  345 

of  capital,  and  this  brings  us  first  to  the  so-called  "  absti- 
nence theory."  It  has  been  said  by  some  economists  that 
interest  is  sufficiently  explained  when  it  is  described  as  the 
wage  or  reward  for  abstinence.  As  we  have  seen,  capital  is 
the  result  of  a  special  production  made  possible  by  saving. 
Saving  or  abstinence  may  not  in  any  particular  instance  in- 
volve any  great  degree  of  suffering.  Millionaires  who  do 
not  consume  at  once  and  finally  all  that  they  have,  are  not 
thereby  made  to  suffer  the  pangs  of  hunger.  It  may  be  that 
they  would  have  great  difficulty  in  consuming  any  large  part 
of  their  goods.  But  saving  does  mean,  none  the  less,'the  con- 
sumption of  less  than  one  might  consume.  We  cannot  have 
capital  if  all  men  consume  all  the  goods  that  they  can  obtain. 
It  may  help  us  to  understand  the  relation  between  saving 
and  interest  if  we  think  of  actual  saving  as  being  the  result 
of  varying  degrees  of  self-denial.  There  are  probably  many 
persons  who  would  rather  put  by  part  of  their  present  goods 
even  if  they  could  not  thus  obtain  interest,  or  even  if  they 
had  to  pay  a  slight  amount  for  the  safe-keeping  of  their 
savings.  If  very  little  capital  were  required,  therefore,  the 
interest  rate  might  fall  to  zero,  since  those  who  wished  to 
save  would  be  glad  to  lend  their  goods  with  a  simple  guaran- 
tee of  repayment.  But  if  capital  is  highly  productive  and  in 
great  demand,  it  will  not  be  possible  to  secure  the  desired 
capital  from  the  savings  of  those  whose  abstinence  represents 
no  sacrifice.  It  may  be  that  when  more  capital  is  demanded, 
an  increase  which  will  bring  the  productiveness  of  the  capi- 
tal and  the  abstinence  necessary  to  its  formation  into  equi- 
librium, may  be  effected  at  a  rate  of  one  per  cent.  Suppose 
the  productiveness  of  the  capital  to  be  still  further  increased. 
Then  those  who  wish  to  engage  in  productive  enterprises 
will  be  able  to  pay  a  higher  rate  and  will  increase  the  demand 
for  capital.    But,  other  things  being  equal,  those  who  would 


346     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

just  save  the  needed  amount  of  capital  at  one  per  cent  must 
Jbe  paid  a  higher  price  if  they  are  to  undergo  the  added  sacri- 
fice necessary  to  the  accumulation  of  more  capital.  This  ex- 
planation should  make  it  clear  that  on  the  side  of  supply  it 
is  to  the  marginal  estimate  of  the  sacrifice  represented  by  the 
marginal  investment  that  the  rate  corresponds.  We  may  say 
in  conclusion  of  this  phase  of  the  matter,  then,  that  interest 
is  fixed  on  the  side  of  the  supply  of  capital  at  a  point  which 
just  repays  the  sacrifice  involved  in  the  marginal  investment. 
As  has  been  said,  this  rate,  thus  fixed,  also  equalizes  the 
sacrifice  of  the  marginal  investor  with  the  productivity  of 
the  marginal  capital  in  use. 

The  Austrian  —  or  Agio  —  Theory  of  Interest.  —  There 
is  to-day  a  very  general  opinion  among  economists  that  none 
of  the  theories  that  have  been  explained  above  really  goes 
to  the  root  of  the  matter.  We  have,  therefore,  to  explain 
another  theory,  which  has  in  recent  years  received  a  great 
deal  of  attention.  This  is  often  called  the  Austrian  theory, 
from  the  country  of  its  origin.  It  is  also  frequently  distin- 
guished as  the  "  agio  "  theory,  from  the  ItaHan  "  aggio  '* 
(meaning,  among  other  things,  discount),  because  it  finds  the 
explanation  of  interest  in  the  fact  that  future  goods  are 
discounted  in  terms  of  present  goods,  as  we  shall  immediately 
explain. 

We  say  that  capital  is  productive  and  hence  bears  in- 
terest. But  why,  fundamentally,  is  it  productive  and  of 
what  is  it  productive  ?  Strictly  speaking,  capital  is  not  pro- 
ductive at  all.  To  say  that  capital  is  productive  is  merely  a 
short  way  of  saying  that  human  labor  produces  more  by  the 
use  of  capital  than  without.  But  granting  that  capital  is 
productive  in  this  sense,  what  is  it  that  capital  produces? 
Generally  the  things  that  it  "  produces  "  are  quite  different 
from  itself.    Machines  make  shoes.     Railways  carry  goods 


INTEREST  347 

and  persons.  How  can  we  compare  the  shoes  with  the 
machines,  or  the  railway  product  with  the  railway  equipment  ? 
Obviously,  if  we  are  to  explain  interest,  we  must  claim  that 
the  aggregate  value  of  the  things  produced  is  greater  than 
the  value  of  the  producing  agents,  and  that  this  difference 
in  value  is  the  interest.  But  have  we  any  right  to  assume 
that  the  value  of  the  product  is  greater  than  the  value  of 
the  agent  ?  To  be  sure,  we  know  that  the  difference  in  value 
exists.  But,  by  the  same  token,  we  know  that  there  is  such 
a  thing  as  interest.  It  is  admitted,  too,  that  the  difference 
in  value  and  interest  are  the  same  thing,  but  it  is  contended 
that  the  real  problem  for  us  is  to  explain  why  there  is  this 
difference  in  value,  which  is  admittedly  interest.  Why  does 
the  value  of  the  aggregate  product  of  capital  exceed  the 
value  of  the  capital  itself  ?  And  so,  while  certain  economists 
explain  that  the  marginal  productivity  theory  is  a  sufficient 
explanation  of  the  interest  problem  from  the  point  of  view 
of  demand,  but  that  it  needs  to  be  supplemented  by  a  cor- 
responding theory  from  the  paint  of  view  of  supply,  other 
economists  hold  that  the  real  explanation  of  interest  lies 
deeper,  and  that  their  theory,  rightly  conceived,  is  an  expla- 
nation of  both  the  supply  side  and  the  demand  side  of  the 
interest  problem. 

It  is  the  position  of  the  authors  of  this  book  that  the 
theories  explained  above  are  partial.  They  are  "  true  "  in 
so  far  as  they  help  us  to  sum  up  and  understand  large  num- 
bers of  economic  facts  in  a  simple  way.  In  other  words,  the 
theories  are  "  true  "  in  so  far  as  they  are  useful  or  usable. 
And  for  many  purposes  these  theories  are  probably  more 
"  workable  "  than  the  "  Austrian  "  theory,  which  we  shall 
now  explain,  admitting,  though  we  do,  that  that  theory  in- 
cludes in  its  scope  more  economic  facts,  and  rests  upon  a 
deeper,  stronger,  and  more  philosophical  foundation. 


348     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

What,  then,  is  it  that  determines  the  rate  which  the  mar- 
ginal investor  will  regard  as  just  repaying  him  for  his  saving 
or  abstinence?  And  what  is  it  that  causes  the  value  of  the 
aggregate  product  of  capital  to  be  greater  than  the  value  of 
the  capital  itself?  These  questions  both  find  a  common 
answer  in  the  Agio  theory  of  interest,  which  is  usually  asso- 
ciated with  the  name  of  Professor  von  Bohm-Bawerk,  one 
of  the  leaders  of  the  so-called  Austrian  or  psychological  school 
of  economists.  To  repeat  our  questions  in  another  form, 
Why  is  it  that  men  —  for  instance,  the  marginal  investor  — 
will  not  give  $50  now  for  $50  ten  years  hence,  even  though 
all  risk  should  be  amply  covered  by  insurance?  Why  will 
not  the  marginal  investor  lend  his  money  without  interest 
even  when  the  loan  involves  no  risks?  And  why  is  it  that 
the  value  of  goods  produced  by  machinery,  after  deduction 
of  amounts  representing  all  other  expenses  of  production,  is 
found  greater  than  the  value  of  the  machinery  itself  ?  Simply 
because  desire^  which  is  the  source  of  value,  is  stronger  for 
things  near  than  for  things  far  away. 

Human  experience  in  a  thousand  lines  furnishes  abundant 
proof  of  this.  The  wants  of  men  are  like  Esau's  hunger. 
He  would  rather  have  —  he  values  higher  —  a  mess  of  pot- 
tage now  than  a  whole  inheritance  in  the  future.  "  A  bird  in 
the  hand  is  worth  two  in  the  bush."  Distant  enjoyments 
are  vague  to  men's  minds,  while  near  ones  are  vivid  and 
tempting.  Thus  it  is  that  a  man  will  rarely  give  present 
goods  for  future  goods  of  like  kind  and  amount,  and  hence 
future  goods  are  less  valuable  than  present  goods. 

Yet  it  becomes  apparent  on  a  moment's  reflection  that 
there  is  the  greatest  difference  among  men  in  the  compara- 
tive estimates  they  place  upon  the  present  and  the  future. 
This  is  in  part  (1)  a  matter  of  civilization.  Thus  travelers 
have  again  and  again  pointed  out  that  among  primitive 


INTEREST  349 

peoples  there  is  the  utmost  recklessness  and  improvidence  of 
the  future.  Hence,  among  savages,  if  interest  were  de- 
manded or  allowed  at  all,  the  rate  would  be  very  high.  The 
comparative  valuation  of  present  and  future  enjoyments 
(2)  varies  widely  also  among  civilized  men.  Some  there  are 
who  are  almost  as  reckless  of  the  future  as  is  the  savage, 
while  there  are  others  who  would  be  glad  to  exchange  a 
quantity  of  present  goods  for  a  like  quantity  or  even  a  less 
quantity  assured  to  them  in  the  future.  The  provident 
classes  would  therefore  save  even  if  the  rate  of  interest 
should  fall  to  a  very  low  figure.  Finally,  (3)  the  compara- 
tive valuation  varies  widely  according  to  the  affluence  or 
wealth  of  the  individual.  What  we  must  have  to  satisfy  the 
pangs  of  hunger  to-day  is  evidently  more  highly  valued  than 
the  same  things  can  be  when  obtainable  only  at  a  future 
time.  Other  things  equal,  then,  the  millionaire  will,  of 
course,  overvalue  the  present  less  than  will  his  poorer  neigh- 
bor. The  man  who  has  an  income  just  sufficient  to  satisfy 
his  physical  requirements  cannot  save,  no  matter  how  high 
the  interest  rate  may  be. 

And  so  the  Agio  theory  sums  up  for  us  briefly  a  multitude 
of  facts  bearing  upon  the  supply  of  capital  and  the  demand 
for  it.  Saving,  or  investment,  and  productivity  are  alike  due 
to  differences  in  value  between  present  and  future  goods  of  like 
kind  and  amount.  The  interest  (or  agio)  is  due  to  this  differ- 
ence. And  the  rate  of  interest  equals  and  is  determined  by 
the  marginal  difference,  i.e.  by  the  difference  as  it  exists  in  the 
minds  of  investors  or  savers  and  determines  their  marginal 
saving. 

Just  one  other  concrete  illustration.  Suppose  that  with 
the  interest  rate  standing  at  a  certain  point,  something 
occurs  to  change  the  minds  of  the  investors.  Endow  them 
all    in    equal    degree   with    greater    foresight  of  possible 


350     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

future  pleasures  and  pains.  At  once  in  the  minds  of  all 
'there  is  less  difference  in  their  valuation  of  present  and 
future  goods.  They  value  the  future  more  highly,  and  by 
necessity,  since  value  is  relative,  they  value  the  present  less 
highly  than  they  did  before.  Concretely,  they  value  the 
machine  more  highly  than  before;  the  goods  produced  by 
it  day  by  day  they  value  less  highly.  The  difference  between 
the  value  of  the  machine  and  the  value  of  its  aggregate 
product  falls.  On  the  other  hand,  those  who  have  been 
saving  save  more,  while  many  who  have  not  saved  before 
join  the  ranks  of  investors,  —  which  means,  as  we  have  ex- 
plained in  an  earlier  chapter,  that  they  spend  more  for  future 
goods  and  less  for  present  goods,  thereby  bidding  up  the 
price  of  machines,  and  at  the  same  time  weakening  the  market 
for  the  product  of  machinery.  From  this  concrete  statement 
the  student  may  see  how  the  difference  in  value  of  present 
and  future  goods  determines  at  once  the  supply  of  capital 
and  the  demand  for  it,  and,  through  their  interaction,  the 
rate  of  interest. 

Summary.  —  Let  us  now  retrace  the  steps  we  have  taken 
and  state  in  summary  form  the  theory  of  interest  which  is 
here  developed.  Interest  is  determined  primarily  by  the  rela- 
tion between  the  demand  for  capital  and  the  supply  of  it,  the 
rate  being  such  as  will  make  possible  the  widest  possible  icse  of 
capital  in  the  existing  state  of  demand  and  supply.  The  de- 
mand for  capital  is  determined  by  its  marginal  productivity. 
The  supply  is  determined  by  the  marginal  sacrifice  involved 
in  saving  or  postponement  of  consumption.  Fundamentally, 
supply  and  demand  are  both  determined  by  the  marginal  dif- 
ference in  the  value  of  present  and  future  goods  of  like  kind 
and  amount,  and  the  rate  of  interest  equals  this  agio. 

Different  Loan  Markets.  —  As  we  have  made  clear  in  the 
foregoing,  the  loans  that  lead  all  others  in  the  modern  world, 


INTEREST  361 

and  that  exercise  a  controlling  influence  upon  interest,  are 
(1)  loans  for  the  purpose  of  acquiring  and  maintaining  capital 
equipment  for  purposes  of  produxition.  Though  the  loan  is 
usually  made  in  the  form  of  money  or  credit,  it  is  not  the 
supply  of  money  that  controls  the  market  for  such  loans. 
If  the  capital  goods  could  be  secured  directly,  it  would  be 
even  better  and  more  economical.  All  that  has  gone  before 
in  this  chapter,  therefore,  is  in  explanation  of  interest  and 
the  rate  of  interest  on  such  loans. 

There  are,  however,  (2)  loan  markets  in  which  money  itself, 
or  credit,  may  practically  he  regarded  as  the  real  end  and  object 
of  the  loan.  In  the  "  money  streets  "  of  great  financial 
cities  men  are  regularly  incurring  obligations  which  can  be 
met  by  money  or  credit  payment  only.  If  one  were  to  offer 
them  other  capital  goods,  the  goods  would  be  refused  unless 
they  could  be  exchanged  at  once  and  without  loss  for  money 
or  credit.  In  these  narrow  markets,  it  may  in  truth  be 
said  that  the  rate  of  interest  depends  upon  the  supply  of 
money  and  credit  and  the  demand  for  them  in  those  markets. 
And  it  must  further  be  admitted  that  in  those  markets,  in 
an  unusual  degree,  the  amount  of  credit  depends  upon  the 
amount  of  money,  largely  in  the  form  of  gold  or  gold  certifi- 
cates. As  the  reserves  accumulate,  the  banks  find  it  neces- 
sary to  lower  the  short  time  interest  rate,  in  order  to  profit '  v 
the  credit  that  they  may  safely  build  upon  the  reserves. 
And  it  thus  happens  that  extreme  fluctuations  in  interest 
rates  occm*  in  such  markets,  even  within  short  intervals  of 
time.  Thus  the  "  street  "  in  New  York  has  seen  the  "  call 
rates  "  fluctuate  within  a  few  months  from  1  per  cent  to 
100  per  cent.  It  cannot  be  too  strongly  emphasized,  how- 
ever, that  the  student  should  keep  the  thought  of  money  or 
credit  entirely  out  of  mind  when  he  is  considering  or  dis- 
cussing the  general  problem  of  interest. 


352     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

The  interest  paid  on  (3)  loans  of  wealth  which  is  not  capital, 
—  not  used  for  purposes  of  further  production,  —  is  governed 
by  the  rate  of  interest  paid  for  capital.  It  is  the  same  per- 
centage of  value.  The  obvious  reason  is  the  power  of  the 
owner  to  sell  his  noncapitalistic  goods  and  invest  the  pro- 
ceeds in  capital  goods.  If  we  should  adopt  the  view  that 
houses  are  not  capital,  but  simply  "  consumers'  goods,"  we 
should  similarly  have  the  rate  of  interest  governed  by  the 
forces  controlling  the  rate  of  interest  on  capital. 

Practical  Circumstances  Affecting  the  Rate.  —  There  is 
both  a  real  and  an  apparent  fluctuation  in  the  interest  rate 
from  place  to  place  and  from  time  to  time.  The  apparent 
fluctuation  is  that  which  is  due  to  the  inclusion  of  insurance 
against  risk  in  a  single  rate  with  the  real  interest.  Thus 
loans  on  good  security  always  conunand  a  lower  rate  than 
others.  This  simply  means  that  a  man  who  takes  some 
risks  as  to  getting  his  money  back  adds  to  the  pure  interest 
a  premium  to  cover  the  risk.  Gross  interest,  then,  includes 
the  two  elements  of  net  or  pure  interest,  —  payment  for 
the  loan  itself,  —  and  insurance  against  risk  of  loss,  or  of 
trouble  in  collection.  Naturally,  therefore,  interest  tends 
to  be  higher  in  uncivilized  countries  and  backward  communi- 
ties. Again,  loans  that  run  for  years  usually  command  a 
slightly  lower  rate  than  loans  made  for  months,  because  with 
such  loans  the  lender  is  saved  the  trouble  of  frequent  rein- 
vestment. Aside  from  these  conditions,  moreover,  a  steady 
diminution  of  pure  or  net  interest  occurs  in  most  civilized 
countries.  This  last  change  is  due,  not  to  lessened  risk,  but 
to  the  change  in  mental  comparisons  between  present  and 
future  goods.  Present  wants,  being  better  satisfied,  are 
less  clamorous  and  contrast  less  vividly  with  future  wants. 
Moreover,  providence  increases  with  civilization.  The 
lowering  of  the  pure  interest  rate  means  that  the  great  body 


INTEREST  353 

of  people  are  both  less  needy  in  the  present  and  more  thought- 
ful of  the  future. 

The  Recent  Rise  in  the  Interest  Rate.  —  We  began  our 
discussion  of  interest  with  the  careful  explanation  that  it  is 
determined  fundamentally,  not  by  the  supply  of  money,  but 
by  the  supply  of  capital.  Later  we  qualified  this  by  explain- 
ing how  in  the  pure  "  money  "  markets  of  financial  centers, 
the  rate  of  interest  varies  inversely  with  the  volume  of  avail- 
able money  and  credit.  The  student  may  have  a  moment 
of  amazed  impatience  when  now  he  is  finally  told  that,  under 
certain  circumstances,  interest  varies  directly  with  changes  in 
the  volume  of  numey  and  credit.  Yet  precisely  this  must  now 
be  said  and  explained.  Between  1900  and  1915  there  was 
an  almost  uninterrupted  rise  in  the  rate  of  interest  on  long- 
time loans  represented  by  such  securities  as  bonds.  Bonds 
paying  as  low  as  three  and  four  per  cent,  or  even  less,  could 
be  sold  at  par  in  the  opening  years  of  the  century.  Those 
same  bonds  now  sell  at  a  heavy  discount,  so  that  the  pur- 
chaser at  the  lower  price  receives  an  interest  yield  on  his 
investment  rising  to  six  per  cent  or  over.  And  bonds  of 
some  great  railways  now  have  to  offer  interest  rates  of  six 
per  cent  or  better  in  order  to  sell  at  par. 

We  have  already  explained  in  another  chapter  the  re- 
markable rise  in  the  general  price  level  that  has  resulted 
from  the  great  increase  of  money  and  credit  in  the  years 
from  1897  to  1915.  In  all  that  period  manufacturers  were 
buying  materials  and  labor  at  the  price  level  of  one  period 
and  selling  the  finished  product  at  the  price  level  of  a  slightly 
later  time.  Broadly  speaking,  there  was  a  continually  re- 
curring gap  between  the  two  price  levels,  which  redounded 
to  the  advantage  of  the  manufacturer.  Under  such  circum- 
stances, business  men  were  more  keenly  competitive  in  the 
urgency  of  their  demand  for  the  world's  stock  of  capital 
2a 


354     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

goods,  and  this  sharpened  demand  tended  constantly  to  force 
up  the  price  paid  for  the  use  of  capital,  i.e.  interest. 

On  the  other  hand,  as  we  have  explained  in  the  chapter 
on  Money,  inflation  of  money  and  credit  lessens  the  purchas- 
ing power  of  money.  A  man  who  put  SI  000  into  a  savings 
bank  in  1900  would  find  when  he  withdrew  it  in  any  subse- 
quent year  that  he  was  getting  back  less  purchasing  power 
than  he  had  originally  put  in.  Under  such  conditions,  long 
continuing,  there  would  be  a  tendency  for  those  who  saved 
to  avoid  saving  except  at  a  higher  rate.  And  this  higher 
rate,  as  we  have  seen,  business  men  would  be  led  by  keen 
competition  to  pay. 

This  same  phenomenon  may  also  be  explained  from  the 
point  of  view  of  the  Agio  theory  of  interest.  Steady  and 
long-continuing  rise  of  prices  results  in  an  increase  in  the  rela- 
tive value  of  present  as  compared  w^ith  future  goods,  thus 
affecting  in  the  same  way  the  economic  calculations  of  those 
who  use  capital  and  of  those  from  whose  saving  the  capital 
is  derived. 

In  conclusion,  it  should  be  emphasized  again  that  in  this 
case  it  is  really  the  capital  interest  that  undergoes  a  change, 
although  here  it  is  a  great  and  long-continued  change  of  the 
quantity  of  money  that  results  in  the  new  equation  of  capital 
demand  and  capital  supply. 

Usury.  —  The  word  "  usury,"  once  applied  to  all  interest, 
is  now  applied  only  to  interest  in  excess  of  the  rate  allowed 
by  law.  The  question  of  whether  laws  should  be  framed 
limiting  the  rate  to  be  received  and  fixing  penalties  for  vio- 
lation has  been  much  discussed.  Economists  are  generally 
agreed  that  the  state  should  not  attempt  to  establish  a  rate, 
except  so  far  as  it  can  confine  the  action  of  the  law  to  loans 
to  the  needy  for  personal  consumption.  In  cases  of  this 
kind  the  experience  of  the  world  is  increasingly  in  favor  of 


INTEREST  355 

regulation.  One  effect  of  usury  laws  is  worthy  of  special 
notice.  When  the  law  has  established  a  fixed  rate,  under 
penalties,  it  may  happen  that  law-abiding  people  will  be  un- 
willing to  make  loans  at  the  legal  rate,  and  that  those  who 
are  willing  to  violate  the  laws  will  thus  have  an  added  reason 
for  charging  a  higher  rate  than  they  otherwise  would.  Com- 
petition among  lenders  is  lessened,  and  the  risk  of  lending 
is  increased.  Both  these  items  act  in  the  direction  of  exces- 
sive rates.  Though  many  countries  have  laws  designed  to 
prevent  the  taking  of  excessive  interest,  the  commercial 
world,  which  is  regulated  in  great  measure  by  the  Konor  of 
business  men,  commonly  proceeds  in  disregard  of  the  law's 
penalties.  Those  who  borrow  at  excessive  rates  do  so  will- 
ingly and  knowingly,  and  are  in  honor  bound  not  to  appeal 
to  the  law  to  escape  their  just  debts. 

SUMMARY 

1.  Interest  is  the  reward  paid  for  the  use  of  capital. 

2.  Capital  differs  from  land  in  that  it  is  produced.     Social  capital 

consists  of  all  producers'  goods. 

3.  Speaking  generally,  interest  is  determined  by  the  relation  be- 

tween the  supply  of  capital  and  the  demand  for  it,  at  a 
point  or  rate  which  equalizes  the  supply  and  the  demand. 

4.  The  demand  for  capital  depends  upon  its  marginal  productive- 

ness, the  value  of  its  product. 

5.  The  supply  of  capital  depends  in  general  upon  its  cost  of  pro- 

duction, i.e.  upon  the  sacrifice  involved  in  postponement 
of  consumption  by  the  marginal  saver  or  investor. 

6.  The  cost  of  postponement  of  consumption  arises  from  the  fact 

that  men  regularly  value  more  highly  the  present  as  com- 
pared with  the  future,  and  the  cost  is  therefore  measured 
by  the  extent  of  this  higher  valuation. 

7.  The  same  difference  in  value  of  present  and  future  goods  ex- 

plains why  capital  is  "productive." 

8.  Capital  loans  should  be  distinguished  carefully  from  loans  of 

money. 

9.  The  interest  rate,  as  ordinarily  quoted,  really  measures  the 

return  for  risk  as   well  as  the  return  for  capital,  which  is 


356     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

pure  interest.  Both  gross  interest  and  pure  interest  tend 
to  fall  with  advancing  civilization. 
10.  During  periods  in  which  an  increase  of  money  and  credit 
results  in  a  steady  rise  in  general  prices,  the  rate  of  in- 
terest on  long-time  loans  rises  to  offset  loss  in  the  capital 
value  of  the  loan. 

QUESTIONS  FOR  RECITATION 

1.  What  are  the  differences  between  capital  and  land?     The 

resemblances  ? 

2.  What  is  interest?     How  was  the  taking  of  interest  regarded 

in  early  times? 

3.  What  is  the  supply  and  demand  theory  of  interest?     What  is 

the  marginal  productivity  theory?  What  element  of  truth 
does  it  contain?  What  is  the  abstinence  theory?  What 
element  of  truth  does  it  contain?  What  is  the  Austrian 
theory  ?     Are  these  theories  necessarily  contradictory  ? 

4.  State  in  summary  form  the  complete  theory  of  interest. 

5.  Is  it  right  to  say  that  the  cost  of  capital  is  abstinence  ?     What 

is  meant  by  marginal  investment?  How  do  relative  valua- 
tions of  present  and  future  compare  in  the  case  of  children 
and  adults?  Of  children  and  savages?  Of  rich  and  poor? 
What  relation  has  this  to  interest? 

6.  Show  in  detail  the  services  rendered  to  production  by  capital. 

7.  What  different  loan  markets  are  to  be  distinguished?     How 

is  the  "rent"  of  houses  determined? 

8.  What  two  elements  are  there  in  the  ordinary  interest  rate? 

What  is  pure  interest?  What  two  reasons  are  there  for 
a  fall  in  the  interest  rate  with  advancing  civilization  ? 

9.  What  is  usury?     What  are  usury  laws?     In  what  cases  are 

usury  laws  beneficial  ? 
10.   Why  has  the  interest  rate  on  bonds  risen  since  1900? 

QUESTIONS  FOR   STUDY   AND   DISCUSSION 

1.  The  word  interest  is  of  Latin  origin.     What  is  its  original 

meaning? 

2.  Could  the  rent  of  an  acre  of  land  be  represented  as  interest  ? 

3.  What  would  be  the  effect  on  interest  of  an  instantaneous  dou- 

bling of  the  world's  capital?     Of  increasing  the  efficiency  of 
the  present  stock  of  capital  ? 

4.  Explain  the  differences  in  rates  of  interest  in  different  sections 

of  the  United  States. 


J^ 


INTEREST  357 

5.  If  the  present  product  of  industry  in  the  United  States  were 

more  evenly  distributed,  what  would  be  the  effect  upon  sav- 
ing? upon  productivity  of  capital?  upon  relative  values  of 
present  and  future  goods  ? 

6.  What  are  some  of  the  effects  of  war  on  capital  and  investment? 

LITERATURE 

See  list  of  works  cited  at  close  of  Chapters  II  and  III.     Also :  — 
Bohm-Bawerk,  E.  von :    Capital  and  Interest,  Translator's  Preface, 

pp.   xix-xx;    also   Positive    Theory    of   Capital,  Bk.  V,  Ch.  Ill, 

pp.  253-259. 
Clark,  J.  B. :    The  Distribution  of  Wealth,  Ch.  XII,  pp.  182-187. 
Walker,  F.  A. :   Political  Economy,  Pt.  IV,  Ch.  Ill,  pp.  218-232, 

and  Pt.  VI,  §  1.  .         ' 

All  standard  works  on  Economics  discuss  these  topics. 


CHAPTER  V 
PROFITS 

Economists  recognize  a  fourth  regular  share  in  the  distri- 
bution of  the  social  income,  though  they  have  not  been 
agreed  as  to  precisely  how  it  is  determined.  The  name 
"  profits  "  is  commonly  used  to  denote  the  total  return  to 
the  entrepreneur  from  the  sale  of  his  product,  after  the  pay- 
ment of  wages  for  labor  employed  and  a  further  payment 
for  land  and  capital  hired.  It  is  evident,  however,  that  this 
return  is  not  a  simple  one,  but  contains  payments  for  several 
elements  that  call  for  separate  treatment.  We  shall  there- 
fore speak  of  this  return  as  gross  profits ^  and  inquire  of  what  it 
consists,  thus  leading  the  way  to  an  understanding  of  the  net 
return  which  may  be  called,  by  contrast,  yure  or  net  profit. 

1.  Rewards  to  Other  Factors  of  Production. —  1.  Interest. 
—  In  the  first  place,  it  is  evident  that  the  return  which  the 
entrepreneur  receives  is  in  part  due  to  the  factors  of  pro- 
duction which  he  himself  owns  and  uses  in  the  business. 
The  return  to  his  capital  invested  is  really  interest,  as  truly 
as  if  it  were  to  be  paid  to  another  person  who  owned  the 
capital  instead  of  to  the  entrepreneur  owner  himself.  In 
estimating  net  profits,  therefore,  careful  bookkeeping  will 
deduct  from  gross  profits  interest  on  capital  invested  by  the 
entrepreneur. 

2.  Rent.  —  The  same  thing,  of  course,  holds  true  of  land 
owned  by  the  entrepreneur.  Rent  should  be  charged  off  in 
the  same  way  as  to  an  outside  owner. 

358 


PROFITS  350 

3.  Wages,  Including  Wages  of  Superintendence.  —  The  ele- 
ment of  wages  and  salaries  of  every  sort,  including  a  regur 
larly  estimated  amount  for  the  entrepreneur  himself,  should  also 
for  scientific  purposes  be  separated  from  gross  profits  in  the 
calculation  of  net  profits.  Private  and  public  corporations 
do  this  regularly,  and  the  practice  is  frequent  in  those  large 
non-corporate  businesses  in  which  the  entrepreneur  is  em- 
ployed just  as  is  any  other  laborer. 

II.  Charges  of  Maintenance.  —  1.  Replacement  Fund  or 
Depreciation  Charge.  —  In  the  second  place,  deduction  must 
be  made  from  gross  profits  of  a  sum  sufiicient  to  proj^ide  for 
the  maintenance  of  the  capital,  or  its  replacement,  as  it  is 
gradually  used  up,  or  as  it  is  suddenly  destroyed.  Modern 
business  bookkeeping  commonly  provides  for  the  replacement 
of  gradual  impairment  by  keeping  a  separate  account  for 
what  is  called  a  maintenance  fund.  A  man  is  facing  business 
ruin  who  takes  and  consumes  as  profits  from  his  plant  what 
should  be  set  aside  for  its  upkeep  and  replacement. 

2.  Insurance.  —  The  same  may  be  said  of  the  payment 
to  provide  against  risk,  which  may  be  called  insurance. 
The  amount  of  money  which  a  careful  business  man  sets 
aside  from  the  unusual  gains  of  prosperous  years  to  secure 
himself  against  disaster  from  losses  in  lean  years  is  not 
profit.  Insurance  in  this  sense  is  much  broader  than  insur- 
ance against  fire,  hail,  etc.,  for  which  a  policy  may  be  taken 
out  and  a  definite  premium  paid.  It  must  be  noticed  that 
when  a  separate  charge  is  made  to  cover  such  risk,  the  allow- 
ance for  interest  on  the  capital  must  leave  out  the  part  due 
to  risk  which  we  have  seen  to  be  present  in  gross  or  market 
interest ;  in  other  words,  the  interest  will  in  such  a  case  be 
the  pure  interest. 

III.  Extra-Personal  Gains.  —  1 .  Monopoly  Gains.  —  Even 
with  all  these  deductions,  the  analysis  is  not  complete.     We 


360     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

must,  in  the  third  place,  deduct  extra-personal  gains,  — 
gains  which  are  not  due  to  the  efficiency  of  the  manager. 
One  of  these  sources  of  gain  lies  in  the  possession  of  a  mo- 
nopoly advantage.  Monopoly  gains  are  a  separate  item  in 
distribution,  and  if  they  are  to  be  called  profits,  as  they 
frequently  are,  we  must  carefully  distinguish  the  particular 
nature  of  such  profits. 

2.  Conjunctural  Gains.  —  Closely  resembling  monopoly 
gains  in  certain  respects  is  a  class  of  gains  known  in  recent 
economic  discussion  as  conjunctural.  As  the  name  indicates, 
these  are  extra-personal  gains  resulting  from  a  favorable 
conjuncture  of  circumstances,  which  could  not  have  been  fore- 
seen. A  simple  instance  of  such  a  gain  is  seen  in  the  profits 
made  by  retail  dealers  when  the  sudden  death  of  a  great 
personage  creates  unusual  demand  for  mourning  goods. 
Stocks  of  black  goods  which  the  merchant  may  have  cen- 
sured himself  for  accumulating  may  suddenly  become  the 
source  of  a  considerable  conjunctural  gain.  Here,  however, 
a  very  real  difficulty  presents  itself.  In  instances  Hke  that 
just  mentioned,  the  conjunctural  element  can  be  plainly 
distinguished.  But  it  often  happens  that  such  gains  are  at 
least  in  part  the  reward  of  foresight  and  energy,  and  are 
therefore  to  be  classed  as  pure  or  net  profit.  The  man  who 
makes  a  fortune  by  buying  up  suburban  property  in  an  un- 
likely neighborhood,  because  he  has  had  sufficient  sagacity 
to  foresee  growth  of  population  in  that  direction,  may  claim 
with  some  reason  that  his  gain  is  not  conjunctural.  Even 
more  reasonable  would  his  claim  be  if,  after  buying  the 
property,  he  himself  directed  the  movement  of  population 
in  that  direction  by  securing  improved  rapid  transit  facili- 
ties and  by  other  familiar  expedients.  In  real  life  all  the 
stages  between  clever  business  foresight  and  pure  conjunc- 
ture are  to  be  observed. 


PROFITS  361 

IV.  Pure  or  Net  Profits.  —  Our  analysis,  then,  gives  us 
as  our  concept  of  pure  or  net  profits  all  that  is  left  after 
deducting  the  items  mentioned.  Of  course  it  will  be  under- 
stood that  not  every  business  shows  in  its  gross  profits  all 
these  different  items.  Sometimes  it  may  even  happen  that 
there  need  be  no  further  deductions  than  those  for  wages 
and  a  maintenance  fund.  But  some  of  the  other  items  are 
usually  present  in  the  estimate  of  gross  profits. 

How  Net  or  Pure  Profit  is  Determined.  —  Society  mmt  at 
any  time  pay  for  its  goods  a  price  sufficient  to  give  even  the 
most  inefficient  manager  whose  services  are  necessary  to  the  pro- 
duction  of  the  supply,  an  amount  covering  the  items  other  than 
net  profits.  But  no  pure  or  net  profits  will  accrue  to  such  a 
marginal  entrepreneur.  More  eflficient  managers  will,  there- 
fore, be  able  to  secure  differential  profit,  the  amount  of  the  dif~ 
ferential  in  every  case  being  determined  by  the  extent  to  which  these 
entrepreneurs  individually  surpass  in  efficiency  the  entrepreneur 
of  only  marginal  efficiency.  Pure  or  net  profit,  therefore,  is  a 
purely  personal  gain  —  a  return  to  superiority  of  management 
as  such,  independently  of  monopoly  advantage,  favorable  con- 
juncture, or  the  mere  labor  of  the  manager  as  a  superintendent. 

Summary.  —  Let  us  summarize  the  considerations  just 
presented :  — 

Reward  to  [  Interest  on  entrepreneur's  capital, 

other  factors  |  Rent  of  entrepreneur's  land, 
of  production  I  Wages  for  entrepreneur's  service. 


Gross  Profits 


Charges  of         f  Replacement  fund, 
maintenance  I  Insurance  fund. 

Extra-personal  f  Monopoly  gains, 
gains  I  Conjunctural  gains. 

Net  profit  —     f  Differential  or  pure  profits 
Personal  gams  i 


362     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Pure  Profit  and  Rent  Compared.  —  This  explanation  of 
the  determination  of  pure  profit  as  a  surplus  due  to  the  su- 
periority of  a  given  entrepreneur  over  the  marginal  or  poorest 
entrepreneur  who  can  afford  to  stay  in  business  at  the  cur- 
rent price  of  the  product,  is,  as  the  student  will  doubtless  have 
noticed,  strikingly  like  the  explanation  of  the  determination 
of  rent.  Thus,  while  wages  and  interest  are  price  determin- 
ing, entering  into  the  price  of  the  product,  rent  and  profits 
are  price  determined;  they  do  not  enter  into  the  price  of  the 
product.  Pm-e  profit  has  hence  been  called,  not  inaptly, 
personal  rent,  or  the  rent  of  managing  ability.  Again,  as 
with  rent,  it  is  interesting  to  notice  the  corollary  that  it  is 
not  the  able  managers,  receiving  large  pure  profit,  any  more 
than  the  fertile  land,  receiving  large  rent,  that  makes  the 
prices  of  commodities  high.  If  all  land  were  of  the  highest 
grade  of  fertility,  the  price  of  produce  would  be  lessened; 
and  in  the  same  way,  if  all  managers  were  of  the  same  order 
of  talent  as  our  ablest  managers,  goods  would  be  produced 
at  a  lower  marginal  expense,  and  society  would  reap  the 
benefit  in  lower  prices.  But  there  is  this  marked  difference 
between  the  rent  of  land  and  pure  profits.  The  more  fertile 
lands  can  exercise  little  influence  in  raising  the  quality  of 
inferior  soils,  while  superior  entrepreneurs  are  always  tend- 
ing to  make  the  knowledge  and  skill  requisite  for  success  a 
matter  of  common  property.  As  business  becomes  more 
completely  organized,  falling  more  and  more  into  routine; 
as  knowledge  becomes  more  widely  diffused  throughout  the 
business  community ;  and  as  governments  improve  in  regu- 
larity and  firmness  and  honesty,  the  marginal  expense  of 
production  and  the  resulting  prices  tend  to  fall,  and  profits 
in  consequence  tend  to  lower  and  lower  limits.  It  is  in  this 
sense  that  profits  may  be  spoken  of  as  "  the  lure  that  insures 
improvement.** 


PROFITS  363 

Pure  Profit  and  Monopoly  Gains  Contrasted.  —  Under 
sharp  and  increasing  competition,  pure  profit  rests  upon  a 
precarious  foundation.  If  the  special  ability  upon  which 
the  profit  depends  is  such  as  cannot  be  duplicated,  the  profit 
will  perish  with  the  single  possessor;  if  the  special  ability 
can  be  duplicated,  rival  concerns  will  possess  themselves  of 
entrepreneurs  of  equal  eiBficiency,  and  the  special  advantage 
tends  to  disappear  through  competition.  But,  as  we  have 
said,  there  are  certain  permanent  extra-personal  advantages, 
entirely  equivalent  otherwise  to  natural  ability,  which  may 
become  the  exclusive  and  permanent  property  of  a'business 
organization.  In  case  of  such  possession,  competition  is 
either  entirely  impossible  or  it  is  possible  only  on  terms 
which  give  to  the  holder  of  the  monopoly  advantage  a  con- 
siderable differential  return.  When  such  an  advantage  is 
enjoyed,  the  power  of  competition  over  price  is  removed; 
prices  no  longer  stand  at  the  point  of  cost;  and  a  surplus 
over  rent,  wages,  interest,  and  profits  is  a  regular  result. 
Unless  interfered  with  by  legislation,  there  could  be  no  out- 
side influence  to  prevent  a  monopoly  from  asking  any  price  it 
pleased,  subject  only  to  the  action  of  the  law  of  monopoly 
price  which  has  been  explained  in  the  chapter  on  Monopolies. 

Another  sharp  contrast  between  pure  profits  and  monopoly 
gains  lies  in  the  fact  that  whereas  pure  profit  is  a  surplus 
produced  by  superior  efficiency,  and  is  in  so  far  no  burden  to 
the  community,  —  which,  indeed,  tends  to  gain  by  it  in  the 
end,  —  monopoly  profit,  on  the  other  hand,  is  a  surplus 
extorted  by  power  and  privilege,  and  is  usually  a  source  of 
loss  to  the  community.  Distribution  of  wealth  is  coming 
increasingly  under  the  influence  of  monopoly.  The  eco- 
nomic surplus  taken  by  monopoly  is  the  source  of  many  of 
the  largest  fortunes  of  our  day,  and  is  one  of  the  main  causes 
of  the  growing  inequalities  of  fortune,  especially  since  our 


364     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Civil  War.  While,  in  general,  competition  increases  in 
severity,  an  increasing  proportion  of  the  industrial  field  is 
withdrawn  from  competition  and  falls  under  the  control  of 
monopoly. 

In  passing  judgment  on  big  business  to-day,  therefore, 
it  is  most  important  to  discover  whether  the  size  of  the 
business  and  of  its  profits  is  due  to  some  monopoly  advantage 
or  advantages,  or  whether  it  is  due  simply  to  the  unusual 
ability  of  its  managers. 

Capital  and  Capitalization.  —  In  considering  monopoly 
gains,  it  is  important  to  understand  the  distinction  between 
capital  and  capitalization.  Capitalization  means  the  amount 
at  which  a  business  or  property  is  valu£d.  The  word  is  there- 
fore used  in  the  language  of  the  market  in  two  ways.  It  is 
sometimes  used  to  describe  the  par  value  of  the  stock  and 
other  securities  issued  by  the  company,  as  representing  the 
company's  nominal  valuution  of  the  business  and  its  earning 
power.  The  word  is  also  used  to  denote  the  market  value 
of  the  business  or  of  its  securities  taken  as  a  whole.  Thus  a 
company  may  be  capitalized  at  $10,000,000  in  the  sense  that 
its  securities  have  that  par  value,  while  the  market  estimate 
of  the  value  of  the  business,  as  reflected  in  the  prices  paid 
for  its  securities,  may  be  much  less  or  much  more  than 
$10,000,000.  Capitalization  in  either  of  these  two  senses 
may  be  many  times  the  amount  of  capital  actually  invested, 
since  it  is  based,  not  on  investment  or  material  cost,  but  upon 
earning  power. 

When  we  speak  of  current  interest  as  being  5  per  cent,  we 
mean  that  free  and  disposable  capital  can  regularly  command 
that  rate  of  return  in  competitive  industry.  Let  us  suppose 
that  the  return  on  equally  safe  investments  that  are  open 
to  all  is  about  5  per  cent,  while  the  annual  return  to  a  great 
oil  company,  which  has  actually  invested  $100,000,000  in 


PROFITS  365 

the  business,  is  50  per  cent.  The  business  may  in  that  case 
be  capitalized  at  $1,000,000,000,  in  such  a  way  that  the  great 
earnings  on  the  actual  investment  will  appear  as  only  5  per 
cent  on  the  capitalization.  To  those  who  are  ignorant  of  the 
difference  between  capital  and  capitalization,  monopolies 
can  often,  by  such  a  plan  as  this,  appeal  successfully  for 
sympathy  and  support  on  the  ground  of  insufficient  earnings, 
even  when  the  return  on  their  actual  investment  is  many 
times  the  market  rate. 

As  profits  on  new  investments  in  competitive  industries 
fall,  the  capitalization  of  monopoly  earnings  mayl)e  raised 
in  proportion,  even  without  the  investment  of  new  capital. 
For  instance,  if  a  monopoly  has  an  earning  power  of  $50,000 
a  year,  the  capitalization  of  this  return  at  5  per  cent  would 
stand  at  $1,000,000.  If,  then,  the  current  rate  of  interest 
should  fall  to  4  per  cent,  while  the  monopoly  earnings  suffered 
no  change,  the  capitalization  of  the  monopoly,  represented 
by  the  market  value  of  its  securities,  would  rise  to  $1,250,000. 

And  yet  it  must  be  remembered  that  the  owners  of  the 
stock  of  monopolistic  businesses  often  include  many  persons 
who  have  paid  on  the  basis  of  the  capitalized  value,  and  who 
do  not  therefore  receive  from  the  monopoly  a  greater  return 
than  they  would  receive  from  investments  in  competitive 
industry.  It  is  those  who  "  get  in  on  the  ground  floor," 
and  who  are  thus  enabled  to  sell  at  the  capitalized  value 
stock  which  they  have  received  on  the  basis  of  actual  invest- 
ment, who  divide  among  them  the  capitalized  monopoly 
earnings. 

SUMMARY 

1.  The  word  "profits"  as  ordinarily  used  in  business  often  includes 
many  elements  of  income  which  are  not  really  profits.  The 
total  surplus  left  in  the  employer's  hands  after  the  payment 
of  contract  wages,  rent,  and  interest  should  be  called  gross 
profits. 


366     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

2.  To  obtain  the  net  profits  of  a  business  there  must  be  subtracted 

from  the  gross  profits  (1)  a  normal  return  for  the  employer's 
own  capital,  land,  and  services,  i.e.  interest,  rent,  and  wages 
of  superintendence;  (2)  charges  of  maintenance,  including 
funds  for  replacement  and  insurance;  (3)  extra-personal 
gains,  including  those  arising  from  monopoly  and  from  chance. 

3.  The  remainder,  or  the  pure  net  profit,  is  a  differential  return 

due  to  the  superior  ability  of  the  entrepreneur,  and  is  in 
many  respects  similar  to  rent. 

4.  Pure  profits  tend  to  diminish^  other  things  being  equal,  as 

education  becomes  more  widely  diffused  and  as  industry 
becomes  more  completely  organized  under  regular  routine. 

5.  Monopoly  profits,  on  the  other  hand,  have  a  more  permanent 

character  in  the  absence  of  government  interference. 

6.  Under  modern  conditions  of  business,   monopoly  profits  are 

often  disguised  by  their  form  of  capitalization. 

QUESTIONS  FOR  RECITATION 

1.  What  are  gross  profits?    What  is  the  difference  between  gross 

profits  and  pure  profits? 

2.  Name  the  deductions  that  must  be  made  from  gross  profits  to 

arrive  at  net  profits. 

3.  What  is  the  replacement  fund  ?     Insurance  fund  ? 

4.  What  are  the  two  classes  of  extra-personal  gains?     What  is 

meant  by  the  word  "  conjunctural "  ?  Mention  instances  of 
conjunctural  gains  that  have  fallen  under  your  observation 
or  that  you  have  met  with  in  reading. 

5.  What  caution  must  be  observed  in  estimating  conjunctural 

profits  ? 

6.  Why  are  pure  profits  like  rent?     How  do  pure  profits  and  rent 

compare  as  to  their  tendency  to  increase  or  decrease  ?  What 
effect  does  competition  have  in  the  long  run  on  pure  profits? 
On  monopoly  profits  ? 

7.  Why  is  it  that  monopoly  profits  often  appear  to  be  only  equal 

to  the  normal  interest  rate?  What  bearing  does  this  have 
upon  popular  opinion  regarding  monopolies  ? 

8.  What   is   the   difference   between   capital   and   capitalization? 

Explain  the  process  of  capitalization. 

9.  What  is  the  effect  of  a  falling  interest  rate  upon  the  capitalized 

value  of  a  monopoly  privilege? 


PROFITS  367 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  What   effects   upon   profits   are  to   be   expected   from   general 

education?  from  industrial  education?  from  the  develop- 
ment of  trade  publications? 

2.  Trace  the  resemblance  between  profits  and  wages  in  the  case  of 

a  great  singer. 

3.  How  far  is  it  possible  to  discover  the  several  distributive  shares 

in  the  financial  statement  of  a  railway  or  industrial  corporation  ? 

4.  If  industrial  change  and  progress  were  to  stop,  would  profits  be 

affected  ? 

5.  What   are  some  of  the  different  ways  in  which  the  superior 

entrepreneur  may  manifest  his  superiority?  If  an  entre- 
preneur who  excels  in  marketing  his  product  unites  with  an 
entrepreneur  who  excels  in  factory  management,  what 
results  may  be  expected? 

LITERATURE 

See  note  on  literature  at  close  of  preceding  chapter.    Also :  — 

Ely,  R.  T. :   Monopolies  and  Trusts,  Ch.  III. 

Jenks,  J.  W. :   The  Trust  Problem. 

Meade,  E.  S. :   Trust  Finance. 

Report  of  the  United  States  Industrial  Commission,  Vol.  XIX, 

pp.  724-730. 
Taussig,  F.  W. :   Principles  of  Political  Economy. 
Walker,  F.  A. :   Principles  of  Political  Economy. 


CHAPTER  VI 
SOCIALISM 

The  Relation  of  Socialism  to  Distribution.  —  In  the  pre- 
ceding chapters  we  have  explained  how  in  the  existing  social 
organization  the  annual  produce  of  industry  —  the  social 
income  —  is  distributed.  As  we  stated  at  the  outset,  the 
method  of  distribution  is  intimately  connected  with  the  legal 
structure  of  society,  and  particularly  with  the  laws  of 
property.  Society,  as  it  exists  in  all  advanced  nations, 
accepts  private  property  as  its  economic  basis.  In  other 
words,  in  the  great  majority  of  goods,  private  proprietorship 
or  private  appropriation  is  not  only  permitted  but  encour- 
aged, and  the  result  is  the  system  of  distribution  which  has 
been  described. 

There  are  considerable  differences  in  the  laws  about 
property  observed  by  different  nations,  and  minor  changes  are 
constantly  being  made;  and  these  differences  and  changes 
result  in  corresponding  differences  and  changes  in  distribu- 
tion. It  would  take  us  too  far  afield  to  attempt  to  treat  of 
them  in  detail.  But  sociaHsm,  which  may  be  described  as 
a  plan  for  changing  the  very  foundation  of  our  economic 
organization,  has  been  proposed  and  discussed  so  seriously, 
and  commands  to-day  so  many  enthusiastic  advocates,  that 
we  cannot  pass  it  by  in  silence  in  our  analysis  of  economic 
theory. 

Such  a  fundamental  change  as  socialists  propose  would, 
we  shall  see  in  the  following  pages,  profoundly  affect  every 

368 


SOCIALISM  369 

one  of  the  four  phases  of  economic  activity  which  we  have 
chosen  as  the  natural  divisions  of  economic  analysis,  —  con- 
sumption, production,  exchange,  and  distribution.  But 
socialism  has  been  put  forward  more  particularly  as  a  remedy 
for  existing  evils  in  the  distribution  of  the  social  income,  and 
we  may  therefore  treat  the  subject  properly  under  that  head. 
It  may  be  noted  in  passing,  moreover,  that  in  general  dis- 
cussions of  the  proposed  change  it  is  commonly  assumed  that 
labor  and  wages  would  be  especially  affected,  and  socialism 
is  therefore  often  handled  in  direct  connection  with  the  sub- 
ject of  wages  and  plans  for  improving  the  status  of  labor. 

General  Characteristics.  —  We  have  already  described 
some  of  the  various  changes  in  the  relation  of  the  laborer 
to  the  product  of  his  labor  that  have  been  tried  or  put  for- 
ward. It  has  been  pointed  out  that  one  of  these  plans, 
cooperation,  may  be  either  voluntary  or  coercive,  —  that 
is,  ordered  and  controlled  by  the  state.  Now  coercive 
cooperation  is  but  another  name  for  socialism.  What,  then, 
is  socialism  ?  It  is,  in  fact,  coercive  or  compulsory  coopera- 
tion, not  merely  in  undertakings  of  a  monopolistic  nature, 
but  in  all  important  productive  enterprises.  Socialists  seek 
the  establishment  of  industrial  democracy  through  the  agency 
of  the  state,  which  they  hold  to  be  the  only  instrument  for 
accomplishing  their  end.  They  would  expand  the  business 
functions  of  government  until  all  dominant  kinds  of  busi- 
ness are  absorbed.  They  would  have  all  such  business  regu- 
lated by  the  people  in  their  organic  capacity,  every  man  and 
every  woman  having  essentially  the  same  rights  as  any  other 
man  or  woman.  Our  political  organization  would  become 
also  an  industrial  organization,  with  universal  suffrage. 
Private  property  in  profit-producing  business  and  rent- 
producing  land  would  be  abolished,  although  private  property 
in  incomes  would  be  in  the  main  preserved.  What  is  desired 
2b 


370     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

by  the  socialist,  then,  is  not,  as  is  supposed  by  the  unin- 
formed, a  division  or  diffusion  of  property,  but  rather  an 
increased  concentration  of  a  very  large  part  of  property. 
The  socialists  do  not  complain  that  productive  property  is 
concentrated  too  much,  but  they  object  that  it  is  not  yet 
suj95ciently  concentrated.  They  therefore  rejoice  in  the 
formation  of  trusts  and  combinations,  regarding  them  as  a 
development  in  the  desired  direction. 

The  Four  Elements  of  Socialism.  —  There  are  four  char- 
acteristic features  of  pure  socialism:  first,  the  common 
ovmership  of  the  means  of  production;  second,  the  common 
management  of  the  means  of  production;  third,  the  distribu- 
tion of  the  product  of  industry  by  common  authority;  fourth, 
private  property  in  the  greater  part  of  income.  Socialists  make 
no  war  on  capital,  strictly  speaking.  What  socialists  object 
to  is  not  capital,  but  the  private  capitalist.  They  desire  to 
socialize  capital  and  to  abolish  capitalists  as  a  distinct  class 
by  making  everybody,  as  a  member  of  the  community,  a 
capitalist ;  that  is,  a  joint  owner  of  substantially  the  whole 
of  the  capital  in  the  country. 

In  support  of  this  plan,  socialists  generally  claim  that  labor 
creates  all  wealth.  No  rational  socialist  means  by  this  to 
deny  that  land  and  capital  are  factors  or  agents  of  produc- 
tion ;  but,  as  they  are  only  passive  factors,  the  socialist  holds 
that  their  owners  should  not  receive  a  share  of  the  product 
simply  through  such  ownership.  Man  is  the  only  active 
agent,  and  all  production  is  conducted  for  the  sake  of  man. 
Socialists  admit  that,  with  industry  organized  as  it  is  now, 
the  owners  of  land  and  capital  must  receive  a  retiu-n ;  and 
hence  they  desire  that  these  tools  should  become  social 
property. 

Distributive  Justice.  —  The  central  aim  of  socialism,  its 
pivotal  point,  is  distributive  justice.    While  it  seeks  to  in- 


SOCIALISM  371 

crease  production  by  more  efficient  organization  and  better 
methods,  its  leading  thought  is  the  just  distribution  of  the 
product.  The  ideas  of  sociaHsts  on  the  question  of  what 
constitutes  justice  in  distribution  are  not  harmonious. 
Some  say  that  (1)  equality  meets  the  claims  of  justice ;  others 
urge  (2)  distribution  in  proportion  to  real  needs,  so  that  each 
man  may  have  the  economic  means  for  his  fullest  develop- 
ment; while  yet  others  say  that  justice  demands  distribu- 
tion (3)  in  proportion  to  merit  or  service  rendered  —  but  that 
the  service  must  be  that  of  the  individual,  not  of  his  ancestors. 
Socialism  an  Extension  of  Existing  Institutions.  —  The 
English  government  now  monopolizes  the  postal  service,  the 
telegraph,  and  the  telephone ;  nearly  all  governments,  local 
or  central,  control  the  roads ;  some  own  canals  and  railways ; 
many  even  possess  factories  of  various  kinds,  and  probably 
every  national  government  does  at  least  a  little  manufactur- 
ing; many  of  them  also  plant  forests,  and  some  cultivate 
arable  land.  We  have  already  seen  that  governments 
already  touch  the  business  world  in  the  following  ways: 
(1)  they  protect  person  and  property;  (2)  they  create  and 
guxirantee  certain  special  privileges;  (3)  they  regulate  the  terms 
of  contract  and  of  competition;  (4)  they  participate  in  private 
enterprises  hy  favorable  tariffs,  bounties,  subsidies,  etc.;  (5)  they 
carry  on  certain  industrial  processes,  such  as  the  construction 
and  maintenance  of  roads,  parks,  Hghthouses,  telegraphs, 
coins,  etc.  To  picture  to  ourselves  sociaHsm  pure  and 
simple,  therefore,  we  have  only  to  imagine  an  extension  of 
what  exists  already  until  a  point  is  reached  where  society, 
through  its  government,  cultivates  the  land,  manufactures 
the  goods,  conducts  the  exchanges,  and  in  short  prosecutes 
most  productive  enterprises.  Such  private  industry  alone 
would  be  permitted  as  would  not  threaten  the  dominating 
power  of  society  in  production  and  in  distribution.    Thus 


372     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

individuals  would  probably  be  allowed  to  cultivate  small 
areas  of  land,  and,  here  and  there,  there  might  perhaps  exist 
a  private  printing-press  supported  from  private  income. 

Not  All  Public  Business  is  Socialistic.  —  It  must  be  ob- 
served that  it  is  not  every  public  activity  in  relation  to  in- 
dustry which  is  socialistic.  Properly  speaking,  that  only  can 
be  considered  socialistic  which  tends  to  render  government 
dominant  throughout  production.  Does  any  proposed  meas- 
ure tend  to  the  suppression  of  production  by  individuals 
or  by  voluntary  cooperation,  and  to  its  absorption  by  the 
government?  Then  it  is  socialistic;  otherwise  it  is  not. 
This  is  the  only  way  to  distinguish  between  sociahstic  and 
nonsociahstic,  or  even  antisocialistic  measures.  It  fur- 
nishes us  with  a  rational  ground  for  judgment.  Are  com- 
pulsory education  and  free  schools  socialistic?  By  our  test 
they  are  decidedly  antisocialistic.  By  developing  capacity 
for  self-help  they  enable  those  who  grow  up  under  their 
influence  to  make  the  best  of  existing  institutions.  They 
are,  indeed,  a  conservative  force.  Is  municipal  ownership 
of  gas  works,  electric-lighting  works,  or  other  natural  monop- 
olies, socialistic?  No;  for  they  accord  with  the  modern 
tendency  to  separate  sharply  the  proper  industrial  functions 
of  private  persons  from  the  proper  industrial  functions  of  the 
organized  community.  There  is  a  sound  principle  —  not 
socialistic  —  underlying-  the  modem  tendency.  The  con- 
viction is  gradually  being  forced  both  by  theory  and  by 
experience  that  most  of  those  industries  which  are  natural 
monopoUes  will  in  the  end  be  owned  and  worked  by  govern- 
ments, and  that  outside  the  field  of  natural  monopoly  there 
is  a  territory  sharply  defined  in  which  business  can  flourish 
only  in  the  atmosphere  of  private  enterprise  and  competition. 
If  we  separate  thus  frankly  and  rationally  the  private  from 
the  public  industrial  sphere,  we  lay  firmly  the  strongest 


SOCIALISM  373 

possible  foundation  for  the  existing  industrial  order,  in- 
stead of  allowing  men  to  drift  haphazard  into  socialism  or 
chaos. 

Socialism  makes  perhaps  its  most  powerful  claim  when  it 
pleads,  first,  for  a  scientific  organization  of  the  prodioctive 
forces  of  society,  and  second,  for  a  just  distribution  of  the 
social  income  from  production. 

1.  The  Relation  of  Socialism  to  Production.  — When  the 
opponent  of  socialism  objects  to  that  system  on  the  ground 
that  an  equal  division  of  the  social  income  would  result 
in  portions  pitifully  small  for  each  individual,  the  socialist 
replies :  "  There  is  little  to  divide  now,  naturally  enough. 
Competition  is  wasteful.  Two  railways  run  where  one 
would  be  enough.  Three  times  as  many  milk  wagons, 
horses,  and  drivers  are  required  to  serve  the  people  with 
milk  as  would  amply  suffice  if  the  business  were  organized 
on  the  plan  of  the  distribution  of  letters  and  parcels.  Look 
at  the  shops,  wholesale  and  retail,  and  note  the  waste  of 
human  force.  Millions  of  dollars  are  expended  annually  in 
advertising,  and  this  sum  would  be  saved  in  the  socialistic 
state.  Without  competition  the  whole  dry  goods  and  grocery 
business  could  be  conducted  with  a  third  of  the  present  ex- 
penditure of  economic  energy.  Reflect,  too,  on  all  the  idle 
classes  in  society,  both  the  idle  rich  and  the  idle  poor.  Social- 
ism would  find  a  place  for  every  man,  and  would  put  all  into 
their  proper  place,  and  by  making  each  dependent  on  his 
own  exertions  for  success,  would  stimulate  our  energies." 
The  socialistic  argument,  continued  indefinitely  in  this  strain, 
is  telling.  It  does  not  prove  the  point,  however,  unless  we 
grant  three  assumptions :  first,  that  present  waste  and  idle- 
ness cannot  he  suppressed  altogether  or  diminished  greatly 
without  departing  from  the  fundamental  principles  of  our 
existing  order ;  second,  that  in  the  advantages  of  competition 


374     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

there  are  not  social  gains  which  jnore  than  oviweigh  the  social 
losses  just  described;  and  third,  that  socialism  is  practicable. 

2.  The  Relation  of  Socialism  to  Distribution.  —  Distribvr 
tive  justice  advances  also  a  strong  plea  for  the  adoption  of  the 
program  of  sociahsm.  It  cannot  be  claimed  for  a  moment 
that  every  man's  income  is  now  adjusted  to  his  social  service. 
An  income  proportioned  to  desert  appeals  to  a  sense  of  right 
and  fitness;  but  cannot  we  approach  more  closely  to  that 
ideal  than  at  present  through  social  reform,  without  going 
to  the  extreme  of  social  reorganization?  No  doubt  the  idle 
man  is  morally  a  thief.  He  receives,  but  in  return  he  gives  no 
personal  effort.  Any  man  who  has  not  earned  the  right  of 
repose  by  his  own  past  services,  with  fruitful  physical  or 
mental  toil,  is  a  shameless  cumberer  of  the  earth,  unless,  in- 
deed, he  is  incapacitated  for  useful  employment. 

Social  Obligations  of  Wealth.  —  We  may  derive  hope 
from  the  fact  that  men  everyv\^here  are  coming  now  to  recog- 
nize the  social  obligations  resting  on  the  individual.  Dr. 
James  Fraser,  late  Bishop  of  Manchester,  expressed  the  idea 
in  words  the  essential  thought  of  which  is  this :  "  Most  of 
us  are  compelled  by  our  necessities  to  render  service  to  our 
fellows.  Some  of  us,  however,  have  inherited  or  received 
money  in  some  way  without  a  return  on  our  part.  We  are 
placed  by  God  on  our  honour.  It  becomes  a  matter,  not  of 
physical  compulsion,  but  of  honour  for  us  to  serve  our  fel- 
lows." What  is  here  said  would  apply  also  to  those  who 
become  wealthy  through  the  accidental  discovery  of  valu- 
able treasures,  such  as  oil,  natural  gas,  or  gold  on  or  under 
the  soil  which  they  own,  or  through  the  growth  of  cities, 
which  adds  immensely  to  the  value  of  favored  land.  Were 
you  to  receive  an  accession  of  wealth  in  such  a  way,  the 
wealth  would  be  yours  in  the  eyes  of  the  law,  but  morally  it 
would  be  simply  a  new  opportunity  for  helping  the  progress 


SOCIALISM  375 

of  humanity.  It  is  the  clear  reaHzation  of  this  idea  that 
leads  men  of  wealth,  especially  in  America,  to  endow  so 
generously  universities  and  other  institutions  for  the  public 
welfare.  This  idea  is  contained  in  the  epigram,  now  famous, 
of  one  of  our  richest  manufacturers,  "  To  die  rich  is  to  die 
disgraced." 

3  and  4.  The  Relation  of  Socialism  to  Exchange  and  Con- 
sumption.  —  We  cannot  find  the  space  necessary  to  discuss 
all  the  economic  changes  that  would  appear  in  a  socialistic 
state.  It  must  suflBce  merely  to  note  that  exchange  and 
consumption,  as  well  as  production  and  distribution,  would 
be  revolutionized.  A  credit  economy  might  supersede  en- 
tirely our  present  mixed  money  and  credit  economy,  and 
socialism,  to  be  consistent,  would  have  to  make  exchange 
values  accurately  proportionate  to  costs  in  human  labor  and 
in  other  sacrifice.  Moreover,  equitable  distribution  of  a 
product  largely  increased,  if  it  could  be  achieved,  would  of 
course  be  reflected  in  the  amount  and  character  of  the  goods 
consumed.  Particularly,  it  may  be  supposed  that  inclusive 
or  common,  as  contrasted  with  exclusive,  enjoyment  of 
wealth  would  fill  a  much  greater  place  in  the  life  of  a  people 
socialistically  organized. 

The  Weaknesses  of  Socialism.  —  In  considering  socialism 
as  a  scheme  for  social  reconstruction,  a  number  of  diflSculties 
are  suggested.  Prominent  among  these  is  (1)  the  probable 
numbing  effect  of  the  system  upon  individual  initiative 
and  energy.  What  motive  to  activity  can  take  the  place  of 
the  desire  for  individual  and  family  advancement  through 
the  accumulation  of  private  property?  Another  very  grave 
difiiculty  lies  in  (2)  the  introduction  of  the  requisite  unity  in 
the  organization  and  management  of  industry.  In  some  in- 
dustries where  the  work  is  of  a  routine  nature,  the  problem 
of  organization  may  not  be  impossible  of  solution.    But 


376     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

what  shall  we  say  of  such  industries  as  agriculture,  which 
has  hitherto  resisted  all  efforts  at  centralization?  In  the 
third  place,  (3)  the  socialist  state  would  have  the  herculean 
task  of  apportioning  work  of  all  conceivable  degrees  of  diffi- 
culty and  disagreeableness  among  the  workers.  How  could 
this  be  accomplished  without  engendering  a  universal  dis- 
content that  would  be  fatal  to  the  plan  at  its  first  inception  ? 

Again  (4)  the  danger  to  personal  freedom  under  the  pro- 
posed system  seems  very  real.  Up  to  a  certain  point,  it  is 
true,  government  seems  to  improve  as  its  functions  increase 
in  number  and  importance.  But  would  this  hold  true 
indefinitely?  We  may  even  grant,  for  argument's  sake, 
that,  as  our  very  livelihood  would  depend  on  the  efficiency 
of  government,  all  the  force  and  energy  that  are  now  ex- 
pended in  private  service  would  be  diverted  into  public 
channels.  But  what  would  happen  if,  in  spite  of  all  pre- 
cautions, some  unscrupulous  combination  should  secure  con- 
trol of  the  state?  Would  there  remain,  inside  or  outside  of 
the  government,  standing  ground  for  effective,  yet  pacific, 
opposition?  It  is  to  be  feared  that  there  would  not.  Dis- 
satisfaction would  exist,  for  human  nature  is  such  that  man 
cannot  be  thoroughly  satisfied  with  his  surroundings.  The 
danger  is  that,  without  proper  means  for  its  expression,  this 
dissatisfaction  would  grow  and  spread  beneath  the  surface 
of  society,  until,  having  no  other  vent,  it  would  at  last  issue 
in  revolution. 

Finally,  we  may  lay  down  the  general  rule  that  (5)  the 
domination  of  a  single  industrial  principle  is  dangerous  to 
civilization.  Many  writers  have  pointed  out  that  it  was  the 
dominance  of  a  single  social  principle  that  led  to  the  down- 
fall of  the  old  civilizations.  What  is  needed  is  a  coordina- 
tion of  the  two  principles,  —  the  principle  of  private  and  of 
public  business.     It  is  desirable  that  some  should  serve  the 


SOCIALISM  377 

public  in  an  oflficial  capacity,  for  some  men  are  specially 
adapted  for  that  work;  but  it  is  equally  desirable  that  an 
ample  field  should  be  left  for  those  who  prefer  private  initia- 
tive and  activity.  Our  present  system,  much  as  it  may  need 
reform,  offers  opportunity  for  coordination  of  these  two 
principles ;   socialism  would  not. 

But  it  is  as  difficult  to  predict  the  ways  in  which  socialism 
would  fail  as  it  is  for  the  socialists  to  say  definitely  how  it 
would  work,  and  this  suggests  their  real  weakness :  they 
venture  to  forecast  the  course  of  economic  evolution  too  far 
in  advance.  Certainly  we  must  have  ideals  and  look-forward 
to  the  future,  but  we  are  unable  to  say  very  long  before- 
hand what  will  be  the  best  means  of  attaining  these  ideals. 
The  hope  that  a  juster  distribution  of  wealth  will  prevail, 
and  that  income  will  represent  more  and  more  fully  social 
service,  is  cherished  by  many  who  do  not  call  themselves 
socialists,  and  who  believe  it  wise  to  concentrate  their  efforts 
on  practicable  social  reform. 

Our  Debt  to  Socialists.  —  Socialists  have  rendered  society 
a  real  service  by  calling  attention  to  pressing  social  problems ; 
by  forcing  us  to  reflect  upon  the  condition  of  the  less  fortu- 
nate classes ;  by  quickening  bur  consciences ;  by  helping  us 
to  form  the  habit,  not  yet  generally  acquired,  of  looking  at 
all  questions  from  the  standpoint  of  public  welfare  and  not 
merely  from  that  of  individual  gain ;  and  finally,  by  calling 
our  attention  to  the  industrial  functions  of  government, 
thus  leading  us  and  aiding  us  to  separate  rationally  the  sphere 
of  private  industry  from  that  of  public  business. 

Socialism  not  Anarchism.  —  Socialism  has  been  described 
as  industrial  democracy  established  and  controlled  by  govern- 
ment. It  is  evident,  therefore,  that  the  socialist  would  give 
to  government  the  greatest  possible  authority.  At  the  op- 
posite extreme  stands  a  proposed  system  which  is  strangely 


378     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

enough  often  confused  by  the  ignorant  with  socialism. 
Anarchism  would  do  away  with  government  entirely,  leaving 
all  axitivity  to  individuals  acting  voluntarily;  socialism,  as  we 
have  seen,  would  lessen  the  sphere  of  individual  initiative, 
leaving  the  greater  part  of  industrial  activity  in  the  hands  of 
government.  In  the  main,  therefore,  anarchism  and  sociaHsm 
are  antithetical.  Yet  there  are  some  anarchists  who  believe 
that,  were  governments  aboHshed,  individuals  would  freely 
of  their  own  accord  form  cooperative  groups  which,  federated, 
would  manage  all  production.  Anarchy  is,  in  the  minds  of 
most  thinking  people,  inconceivable. 

Commimism,  Socialism,  and  Collectivism.  —  Conmiunism 
is  a  term  which  is  not  much  used  in  recent  writing.  In  the 
past  it  was  employed  to  designate  an  extreme  kind  of 
sociaHsm.  Communism  required  equality  of  possessions 
and  of  incomeT  without  niuclijrega^  to  the  matter  of  the 
regulation  ofjacpduction.     Some  writers  have  used  the  word 

communism "  to  designate  violent  schemes  of  radical 
social  reforms  as  distinguished  from  the  more  peaceful  and 
conservative  plans  of  reconstruction,  which  they  intend  by 
the  name  sociaHsm.  Yet  the  communistic  societies  in  the 
United  States  are  composed  of  peace  men,  who  do  not  believe 
in  war,  and  even  preach  nonresistance  to  aggression.  It  is 
as  well,  perhaps,  to  abandon  the  attempt  to  make  a  perma- 
nent distinction  between  communism  and  socialism,  by 
simply  discarding  the  word  "communism."  Collectivism  is 
a  name  which  many  socialists  of  recent  years  have  favored 
as  a  designation  of  their  program.  Sometimes  they  have 
chosen  the  term  in  order  to  escape  the  odium  which  in  past 
years  has  been  attached  to  the  older  word. 

Divisions  among  Socialists.  —  Socialism  is  not  only  a 
theory  of  society,  but  also  a  practical  program.  Socialists 
are  far  from  being  of  one  mind  as  to  what  ought  to  be  done 


SOCIALISM  379 

to  bring  about  socialism.  A  small  minority  of  them  believe 
that  the  advocacy  of  socialism  through  the  medium  of  the 
written  and  spoken  word  is  sufficient.  To  that  group  belong 
many  of  the  Christian  Socialists^  who  base  their  argument 
and  their  hope  upon  the  Christian  Gospel.  Another  minor- 
ity, probably  somewhat  larger  than  the  former,  while  holding 
that  socialists  should  actively  participate  in  politics,  favor 
action  through  any  progressive  party,  especially  if  it  is  a 
labor  party.  Such  are  the  Fabian  Socialists  in  England, 
who  have  adopted  as  their  rule  of  action  "Make  Haste 
Slowly."  But  the  preponderant  majority  of  socialists 
believe  that  socialists  ought  always  to  form  a  distinctive 
party  of  their  own  with  a  clear-cut  socialist  program. 

Yet  even  among  the  political  socialists  there  has  arisen, 
during  the  past  fifteen  years,  a  strong  divergence  of  opinion. 
The  more  radical  of  them  minimize  the  importance  of  imme- 
diate betterment  of  the  condition  of  the  wage  earner,  and 
look  to  the  enactment  of  the  full  socialist  program  as 
being  by  far  the  most  important  aim  worth  striving  for,  even 
though  it  might  not  be  achieved  for  many  years  to  come. 
These  socialists  designate  themselves  as  Marxists,  or 
Scientific  Socialists,  and  are  more  or  less  literal  followers  of 
Karl  Marx,  who  in  his  large  work.  Capital,  tried  to  show  that 
socialism  is  destined  to  arrive  in  its  time,  through  the  evolu- 
tion of  the  great  underlying  forces  in  industrial  society, 
namely,  the  concentration  of  capital  in  a  few  hands  and  the 
growing  misery  of  the  working  class  under  the  capitalist 
system.  The  other  faction,  the  Revisionists,  question  the 
correctness  of  the  Marxian  forecast  and  prefer  to  work  for 
legislation  which  will  immediately  improve  the  lot  of  the 
workingmen.  Notwithstanding  their  differences,  Revi- 
sionists and  Marxists  cooperate  in  the  same  political  party, 
which  generally,  but  notably  in  Germany,  is  known  as  the 


380     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Social  Democratic  Party,  and  its  followers  as  Social  Demo- 
crats. Perhaps  the  larger  part  of  political  socialists  in 
Europe  and  America  are  still  Marxists. 

In  opposition  to  both  brands  of  political  socialism,  espe- 
cially the  Revisionists,  we  find  the  French  Syndicalists,  who 
maintain  that  no  political  party  is  capable  of  keeping  out 
corruption  from  its  midst,  who  believe  in  the  "  war  of  the 
classes  "  and  the  "  general  strike,"  and  who  would  commit  the 
ownership  and  control  of  each  industry  to  the  workingmen 
organized  in  syndicates  or  trade  unions,  and  loosely  bound 
together  in  the  C.  G.  T.  (the  "  Confederation  Generale  du 
Travail  ")•  Syndicalism  has  within  recent  years  spread 
rapidly  to  other  countries.  In  the  United  States,  it  is  repre- 
sented by  the  so-called  "I.W.W.,"  i.e.  Industrial  Workers 
of  the  World. 

As  socialism  depends  for  its  success  upon  arousing  the 
emotions  of  the  masses  of  the  people,  it  meets  formidable 
rivals  in  both  nationalism  and  imperialism,  which  make 
their  appeal  to  another  set  of  powerful  emotions  that  sway 
the  modern  man,  namely,  the  desire  to  lift  one's  nation  above 
the  others  in  power  and  in  the  sphere  of  its  dominion. 

Present  Status  of  the  Socialist  Political  Movement.  — 
Socialism  as  a  general  p)olitical  movement  has  been  making 
rapid  strides  in  Europe  within  the  last  few  years.  It  is 
impossible  to  form  an  accurate  estimate  of  the  aggregate 
munber  of  political  socialists  at  the  present  time,  but  certain 
figures  are  available  which  indicate  the  quick  growth  and 
present  status  of  the  party.  Thus  in  the  German  Empire 
the  number  of  votes  cast  for  socialist  candidates  for  the 
Reichstag  rose  in  the  sixteen  years,  1887  to  1903,  from  763,128 
to  3,011,114.  This  represents  a  change  from  10.1  per  cent 
to  31.7  per  cent  of  the  entire  vote  of  the  Empire.  In  1912 
the  figure  was  34.9  per  cent,  the  total  of  votes  was  4,250,329, 


:-^: 


SOCIALISM  381 

and,  though  the  actual  number  of  Social  Democratic  mem-^ 
bers  of  the  Reichstag  was  only  110,  it  should  on  the  basis 
of  votes  cast  have  been  131.  Ninety-three  newspapers, 
with  a  circulation  of  1,800,000,  belonged  to  the  party  in  1914. 
In  Italy,  in  1913,  53  "  regular  "  socialists  were  elected  to 
Parliament  by  825,000  votes ;  in  Austria,  in  1911,  there  were 
82  socialist  members  of  the  Lower  House,  elected  by  over  a 
million  votes ;  and  in  Vienna  alone,  20  of  the  33  representa- 
tives were  socialists.  In  France,  in  the  election  of  1914,  102 
socialist  deputies  were  elected,  and  the  total  socialist  vote 
was  slightly  below  1,400,000 ;  but  the  fact  that  M.  Millerand, 
a  socialist,  found  a  place  in  the  Cabinet  formed  in  1901,  and 
that  M.  Briand,  another  former  socialist,  became  Prime 
Minister  subsequently,  to  be  followed  at  a  later  date  by  M. 
Viviani,  is  perhaps  more  significant  than  many  figures.  In 
England,  where  large  parties  have  always  been  few  in  number, 
socialism  has  shown  a  tendency  to  avoid  the  ordinary  political 
channels.  The  same  is  true  of  the  United  States,  although 
in  recent  elections  surprising  gains  have  been  made  by  organ- 
ized socialists.  In  1912  the  total  sociaHst  vote  for  Presi- 
dent was  about  900,000 ;  but  in  1916  the  socialist  vote  for 
President  exceeded  600,000  only  slightly.  A  conservative 
estimate  of  the  total  socialist  vote  of  the  world  would  place 
it  probably  in  the  neighborhood  of  10,000,000.  We  should 
not  overlook  the  fact  that  many  who  vote  for  socialist  candi- 
dates do  so,  not  because  they  are  socialists,  but  because 
they  desire  to  express  in  a  most  telling  way  their  discontent 
with  existing  governments.  That  particularly  applies  to 
Germany. 

SUMMARY 

1.  Socialism  is  coercive  cooperation  in  production. 

2.  Socialists  would  permit  private  property  in  income,  but  not  in 

means  of  production. 


382     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

3.  Socialists  olaim  that  labor  produces  all  wealth,  and  they  aim 

at  a  distribution  based  on  justice. 

4.  Socialism  is  but  an  extension  of  existing  institutions. 

5.  The  strength  of  socialism  lies  in  its  suggested  saving  of  waste, 

in  its  proposal  for  a  juster  distribution,  and  in  its  demand 
for  the  recognition  of  the  social  obligations  of  wealth. 

6.  Its  weakness  Ues  in  its  requirement  of  impossible  human  virtues. 

7.  Anarchism  is  really  the  opposite  of  socialism. 

8.  There  are  many  differences  of  view  among  socialists,   these 

differences  giving  rise  to  distinct  names  for  the  different 
groups. 

9.  The  political  socialists  have  increased  rapidly  in  number  in 

Europe  during  recent  years. 

QUESTIONS  FOR  RECITATION 

1.  Define  socialism;    anarchism.     What  is  Christian  socialism? 

Evolutionary  socialism?     Fabian  socialism? 

2.  How  far  does  socialism  abolish  private  property? 

3.  What  effect  would  socialism,  if  successful,  have  on  production? 

On  distribution?     On  exchange?     On  consumption? 

4.  What  difficulties  stand  in  the  way  of  realization  of  socialism  ? 

5.  Why  is  it  not  right  to  say  of  every  public  interference  in  industry 

that  it  is  socialistic  ?     When  may  a  measure  be  called  social- 
istic? 

6.  What  is  the  origin  of  wealth  according  to  socialists?     Discuss 

this  claim. 

7.  Why  is  anarchism  not  feasible? 

QUESTIONS  FOR  STUDY  AND  DISCUSSION 

1.  Consider  carefully  possible  answers  to  the  question,  commonly 

directed  against  socialism  :  Who  woxild  do  the  "dirty  work" ? 

2.  Discuss  the  argument  for  and  against  the  use  of  diamonds. 

3.  Discuss  the  possible  bearings  of  socialism  on  the  growth  of 

population. 

4.  Would  universal  education  to  the  twentieth  year  of  age  be 

socialism?     Would  it  bring  about  equality  of  income? 

5.  Would  abolition  of  the  right  of  inheritance  be  socialism? 

6.  Can  society  work  toward  equality  of  income  without  "taking 

from  those  who  have"? 

7.  Is  it  socially  and  politically  desirable  that  there  should  be  a 

closer  approach  to  equality  of  income  than  is  the  case  to-day  ? 
Would  there  be  an  economic  gain  ? 


SOCIALISM  383 

8.  What  constitutional  changes  would  be  required  for  the  in- 

troduction of  socialism  in  the  United  States? 

9.  Study  conditions  in  your  own  neighborhood  and  consider  whether 

or  not,  as  to  wage-earners  and  others,  they  correspond  to  the 
allegations  of  the  socialists. 

10.  Name  prominent  poets  and  novelists  and  politicians  who  belong 

to  one  or  another  of  the  sociaUst  schools. 

LITERATURE 

Brooks,  J.  G. :    The  Social  Unrest,  Ch.  VIIT. 

Ely,  R.  T. :  Property  and  Contract  in  their  Relations  to  the  Distribu- 
tion of  Wealth,  especially  Vol.  II,  Appendix  III,  pp.  823-852, 
Production,  Present  and  Future,  by  Dr.  W.  I.  Eling;^and  also 
Socialism  and  Social  Reform. 

Enson,  E.  C.  K. :   Modern  Socialism. 

Kirkup,  E. :  Inquiry  into  Socialism^  and  History  of  Socialism. 

Marx,  Karl :  Capital. 

Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  II,  Ch.  I,  §§2,  3, 
and  4. 

Morley,  H.  (Editor) :   Ideal  Commonwealths. 

Rae,  J. :    Contemporary  Socialism. 

Spargo,  John:  Karl  Marx,  his  Life  and  Work;  also  numerous 
other  books  and  pamphlets. 

Walling,  William  English:  Socialism  as  It  Is,  Progressivism  and 
After,  and  also  Socialism  of  Today. 

Arguments  against  Socialism  are  found  in  nearly  all  standard  eco- 
nomic treatises,  e.g.  those  by  Marshall,  Taussig,  Seager, 
Seligmau. 


BOOK   IV 

PUBLIC  FINANCE 

CHAPTER  I 
EXPENDITURE  AND  REVENUE 

Definition  of  Public  Finance.  —  Public  finance  is  the 
science,  or  the  branch  of  economics,  which  deals  with  the  rev- 
enues and  expenditures  of  government,  and  with  their  ad- 
ministration. The  name  must  be  carefully  distinguished 
from  private  finance,  which  deals  with  the  revenues  and 
expenditures  of  an  individual  or  a  private  business,  and  from 
corporation  finance,  which  deals  with  the  revenues  and 
expenditures  of  private  corporations.  The  student  is  also 
cautioned  against  referring  the  word,  as  is  often  mistakenly 
done,  to  the  subjects  of  money  and  banking,  which  belong  to 
another  part  of  economics. 

Early  treatises  in  English  economics  usually  had  no  special 
part  devoted  to  public  finance,  but  included  some  observa- 
tions on  taxation  in  the  treatment  of  other  general  topics. 
It  is  true  that  the  diflSculty  of  saying  anything  satisfactory 
about  a  subject  so  vast,  within  the  scope  of  a  few  pages,  is 
a  serious  one ;  yet  it  does  not  seem  scientifically  satisfactory 
to  pass  over  one  of  the  most  important  economic  topics, 
even  in  an  elementary  treatise.    We  shall  therefore  attempt 

384 


EXPENDITURE   AND   REVENUE  385 

to  give  some  impression  as  to  the  nature  and  scope  of  public 
finance,  while  reminding  the  student  that  later  and  more 
careful  study  of  the  subject  should  be  carried  on  with  the 
help  of  some  regular  textbook  entirely  devoted  to  it. 

The  Magnitude  and  Influence  of  Public  Business.  — 
Government  business  is  the  largest  single  business  in  every 
great  nation.  So  vast  and  so  permeating  is  it  that  it  affects 
vitally  all  other  businesses.  If  our  government  should  have 
a  large  surplus  every  year,  and  should  keep  it  out  of  circula- 
tion, we  should  shortly  have  a  stringency  in  the  money  market 
that  would  result  in  a  terrible  panic.  Still  another  feature  of 
government  business  has  an  important  bearing  on  all  pri- 
vate business :  government  to-day  is  the  largest  single  em- 
ployer of  labor,  and  hence  profoundly  influences  the  condi- 
tions of  employment  elsewhere. 

The  Magnitude  of  Public  Expenditure.  —  The  importance 
of  public  finance  becomes  more  apparent  when  we  consider 
the  magnitude  of  government  expenditures  in  modern  times. 
The  fact  has  often  been  cited  that  England's  expenditure 
increased  forty-fold  between  1685  and  1841,  while  her 
population  was  increasing  only  threefold;  but  this  is  only 
one  of  many  equally  significant  facts.  The  annual  national 
expenditure  of  Great  Britain,  after  a  slight  decrease  fol- 
lowing the  Napoleonic  wars,  has  increased  quite  regularly 
since,  rising  from  about  $235,000,000  in  1833  to  nearly 
$1,000,000,000  in  1913-14,  just  before  the  outbreak  of  the 
European  War. 

The  French  budget, —  the  name  applied  to  the  detailed 
statement  of  revenues  and  expenditures  —  showed  expenditures 
of  a  thousand  million  francs,  or  about  $200,000,000,  in  1821 
for  the  first  time,  and  the  result  was  widespread  alarm ;  yet 
no  French  budget  since  that  time  has  called  for  smaller 
expenditure,  and  in  1913  the  total  annual  expenditure  of 
2c 


386      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

France  and  her  minor  governmental  divisions  amounted  to 
more  than  five  times  the  figure  of  1821. 

Growth  of  Expenditure  in  the  United  States.  —  The  fol- 
lowing table  shows  a  similar  increase  in  the  Federal  expen- 
ditures of  the  United  States  down  to  1914,  since  which  year 
the  increase  has  been  even  more  rapid  for  reasons  growing 
out  of  the  great  war :  — 

Federal  Expenditures  op  the  United  States 

(Exclusive  of  "premiums,"  postal  service,  Panama  Canal,  and 
principal  of  public  debt) 


Ybab 

Obdinabt  Expendi- 

TUBBB 

Interest 

Total 

Pkb 
Capita 

1792 

$  5,896,000 

$     2,373,000 

$    8,269,000 

$2.04 

1800 

7,411,000 

3,402,000 

10,813,000 

1.17 

1820 

13,134,000 

5,151,000 

18,285,000 

1.90 

1840 

24,139,000 

174,000 

24,313,000 

1.42 

1860 

60,056,000 

3,144,000 

63,200,000 

2.01 

1870 

164,421,000 

129,235,000 

293,656,000 

7.61 

1880 

169,090,000 

95,757,000 

264,847,000 

5.28 

1890 

261,637,000 

36,099,000 

297,736,000 

4.75 

1900 

447,553,000 

40,160,000 

487,713.000 

6.39 

1910 

638,450,000 

21,275,000 

659,705,000 

7.30 

1914 

677,390,000 

22,683,000 

700,253,000 

7.07 

Causes  of  Growth.  —  It  must  not  be  thought  that  this 
great  increase  in  public  expenditures  is  due  to  recklessness  or 
dishonesty.  Probably,  on  the  whole,  government  has  im- 
proved during  the  last  century;  and  it  is  significant  that 
where  government  is  most  undoubtedly  honest,  there  have 
been  larger  increases  than  in  many  other  quarters.  The 
explanation  of  the  increase  is  not  difficult .  In  the  first  place, 
we  must  remember  that  population  has  been  increasing  more 
rapidly  than  ever  before,  and  that  increase  in  aggregate 


EXPENDITURE   AND   REVENUE  387 

expenditure  does  not  mean  a  proportionate  increase  in  the 
burden  borne  by  individuals.  Other  causes  are  the  drift 
toward  the  city,  the  greater  density  of  population,  the  general 
increase  of  wealth,  higher  standards  of  living,  and  higher 
price  levels.  The  increase  of  government  expenditure  is 
less  startling  when  compared  with  the  growth  of  national 
wealth-capita.  Besides  this,  we  must  conclude  that  govern- 
ment activity,  while  wiser  than  before,  is  also  more  extensive 
and  important.  Public  schools,  provision  for  public  health, 
public  parks,  public  baths,  public  libraries,  all  show  the 
greatly  increased  range  of  state  activity  in  modern  times. 
With  some  unfortunate  exceptions  these  increased  expendi- 
tures are  a  sign  of  health,  and  do  not  indicate  any  tendency 
on  the  part  of  government  to  absorb  an  undue  proportion 
of  the  industrial  life  of  the  nation. 

This  can  hardly  be  said,  however,  of  the  great  increase 
in  expenditure  for  pensions  and  for  military  and  naval  equip- 
ment. Whether  these  expenditures  have  been  wisely  or  un- 
wisely made,  it  is  at  least  regrettable  that  considerably 
more  than  70  per  cent  of  the  regular  Federal  expenditures 
are  due  to  past  wars  and  to  the  preparation  for  war.  The 
burden  of  this  expenditure  alone  amounted  in  1910  to  about 
$439,781,000,  or  an  average  of  about  S4.70  for  every  man, 
woman,  and  child  in  the  United  States.  This  represented 
about  $24  a  year  for  every  family  of  five.  Laws  passed  in 
1915  and  1916  still  further  increased  the  per  capita  expense 
attributable  to  war. 

Classification  of  Public  Expenditures.  —  So  numerous  are 
the  objects  of  governmental  expenditure  that  it  is  manifestly 
impossible  to  treat  the  subject  exhaustively  within  the  limits 
of  our  space.  We  must  content  ourselves  here  with  a  con- 
sideration of  some  of  the  more  important  classes  into  which 
such  expenditures  fall. 


388     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

1.  Expenditures  for  Fulfilling  the  Protective  Functions  of 
the  State.  —  Of  the  general  class  of  expenditures  incurred 
in  fulfilling  the  protective  function  of  the  state,  the  first 
to  be  mentioned  are  those  (a)  for  security  from  foes  vrithout 
the  state.  Under  this  head  falls  the  cost  of  the  army  and 
navy.  The  direct  cost  of  national  defense  includes  the  pay 
and  equipment  of  troops,  and  the  cost  of  ships,  cannon, 
ammunition,  etc.  The  indirect  cost  is  represented  by  the 
pension  list,  as  well  as  by  the  great  waste  of  resources  and 
opportunities  for  labor  in  times  of  war. 

(6)  Internal  Security.  —  Under  expenditures  for  internal 
security  are  included  the  cost  of  our  police  system  in  all  its 
branches,  —  including  constables,  sheriffs,  etc.,  —  and  that 
of  our  judiciary  system,  since  both  of  these  are  occupied 
almost  wholly  in  securing  persons  and  property  from  injury. 

(c)  Expenditures  for  the  Poor  and  Unfortunate.  —  Every 
civilized  government  recognizes  an  obligation  to  extend 
relief  to  paupers,  to  the  deaf,  the  blind,  the  insane,  and  the 
feeble-minded,  who,  from  natural  defects,  are  unable  to 
hold  their  own  in  the  struggle  for  existence. 

2.  Expenditures  for  Fulfilling  the  Commercial  Functions.  — 
A  second  general  class  of  expenditures  consists  of  those 
which  are  incmred  in  fulfilling  the  commercial  functions  of 
the  state.  Among  these  are  expenditures  (a)  for  the  con- 
struetion  and  maintenance  of  such  agencies  as  roads,  hridgeSf 
canalsy  and  riverways,  improved  harbors,  lighthouses,  etc. 
(b)  The  post-office  and  telegraph  and  railway  lines  are  also 
commercial  as  well  as  educational  in  their  purpose,  but  they 
are  generally  managed  as  self-sustaining  or  remunerative 
investments,  even  when  they  are  under  the  ownership  and 
management  of  the  state.  A  similar  expenditure  for  com- 
merce is  that  (c)  for  maintaining  a  currency  and  systems  of 
weights   and   measures,     (d)    Expenditure  for  the  consular 


EXPENDITURE   AND   REVENUE  389 

service  also  falls  under  the  same  general  head.  To  a  less 
degree  the  same  may  be  said  of  the  diplomatic  service,  though 
in  this  case  the  purpose  of  the  service  is  perhaps  primarily 
for  maintaining  international  peace. 

3.  Expenditures  for  Fulfilling  the  Developmental  Functions. 
—  The  third  general  class  of  expenditures  consists  of  those 
incurred  in  fulfilling  the  developmental  function  of  the 
state.  Most  important  among  these  is  (a)  the  expenditure 
for  education.  Of  all  classes  of  expenditure  that  for  educa- 
tion has  grown  most  constantly  and  rapidly  in  the  modern 
state.  Under  the  head  of  education  fall  not  only  the  educa- 
tion of  the  schools,  but  also  that  which  is  to  be  gained  from 
art  galleries  and  museums  and  other  agencies  for  the  promo- 
tion of  culture. 

Other  expenditures  falling  in  the  same  general  class  are 
those  for  (6)  public  recreation,  for  (c)  investigation,  for  (d) 
maintaining  equitable  conditions  for  private  Imsiness,  for  (e) 
agricultural  development,  and  for  (/)   public  health  service. 

4.  Expenditures  for  the  Maintenance  of  Government.  — 
The  expenditures  we  have  been  considering  are,  of  course, 
expenditures  by  government:  we  have  now  to  mention  a 
fourth  general  class,  —  the  expenditures  for  government ; 
that  is,  expenditures  for  governmental  functions  too  general 
and  fundamental  to  be  ranged  under  any  of  the  heads  that 
we  have  before  mentioned,  corresponding  to  the  so-called 
"  overhead "  costs  of  a  private  business.  Such  are  the 
expenditures  for  (a)  legislation  and  administration,  and  for 
(6)  tax  collection. 

Objects  of  Public  Expenditure  in  the  United  States. — 
It  is  not  customary  for  governments  to  classify  their  ex- 
penditures as  we  have  here  classified  them,  or  in  any  such 
way  as  will  show  accurately  just  what  the  government  pays 
for  the  objects  which  we  have  discussed.     But  a  careful 


390     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

study  of  Federal,  state,  and  local  expenditures  will  show  that 
the  greater  part  of  the  Federal  expenditure  is  for  the  protec- 
tive and  commercial  functions,  while  the  greater  part  of  the 
expense  of  the  developmental  functions  rests  upon  the 
state  and  local  governments.  Considering  the  aggregate  ex- 
penditures of  all  the  divisions  of  government,  we  find  that 
they  are  roughly  divided  as  follows :  for  the  protective  func- 
tions, about  45  per  cent;  for  the  developmental  functions, 
^aboUt  30  per  cent;  for  the  commercial  functions,  about  15 
per  cent;  and  for  the  expenses  of  government  itself,  about 
10  per  cent. 

It  is  also  interesting  to  note  the  relative  growth  of  ex- 
penditure in  the  different  political  divisions  of  the  govern- 
ment. Not  only  in  the  United  States,  but  also  quite  gener- 
ally throughout  the  civilized  world  an  increasing  proportion 
of  the  aggregate  expenditure  is  being  made  by  the  local 
governments,  from  which  it  appears  that  the  greatest  in- 
crease in  governmental  activity  occurs  where  government  is 
most  directly  and  closely  watched  and  administered  by  the 
people  themselves.  In  the  United  States,  until  the  last 
few  years,  the  expenditures  of  the  state  governments  have, 
as  a  rule,  diminished  in  importance  relatively  both  to  Federal 
and  local  expenditures,  and  this  fact  has  generally  been  held 
to  indicate  growing  nationalization  as  well  as  growing  govern- 
mental activity ;  but  within  recent  years  the  state  expendi- 
tures have  grown  rapidly,  showing  that  the  states  are 
increasing  in  social  and  economic  significance. 

Classification  of  Public  Revenues.  —  Differing  classifica- 
tions of  public  revenue  have  been  almost  as  numerous  as 
the  writers  who  have  made  them.  Without  entering  into  a 
discussion  of  the  reasons  for  such  differences,  we  may  pre- 
sent at  once  a  classification  which  is  in  general  harmony 
with  the  usual  treatment  of  the  subject. 


.:•/. 


EXPENDITURE   AND  REVENUE  391 

A.  Permanent  Revenues. 
I.   Regular  revenues. 

1.   Derived  directly  from  government  ownership. 

a.  Revenues  from  public  domains. 

b.  Revenues  from  public  industries. 

2.    Derived  from  the  incomes  of  private  persons  and 
corporations. 

a.  Fees. 

b.  Special  assessments. 

c.  Taxes. 

II.   Irregular  and  miscellaneous.     Fines,  forfeits^  escheats, 
gifts,  indemnities,  etc. 

B.  Temporary  Revenues.     (To  be  repaid.) 
I.   Public  loans  by  the  sale  of  bonds. 

II.   Public  loans  by  the  issue  of  treasurer  notes. 


The  subject  of  public  revenue  is  a  complicated  one  and  can 
only  be  briefly  outlined  here.  Of  the  above  forms  of  revenue, 
only  public  loans,  fees,  special  assessments,  and  taxes  will  be 
discussed. 

Public  Loans.  —  Great  national  debts  are  comparatively 
new  in  the  world's  history.  Indeed,  their  origin  is  as  recent 
as  the  reign  of  William  and  Mary  in  England.  During  the 
nineteenth  century  they  grew  with  threatening  rapidity  in 
nearly  all  the  countries  of  the  civilized  world.  Even  before 
the  great  European  war,  grave  doubts  were  entertained  as  to 
the  ability  of  some  of  the  European  peoples  to  carry  the  bur- 
den of  their  debt.  The  war  in  its  first  year  is  calculated  to 
have  involved  an  extra  expenditure  of  nearly  $18,000,000,000 
by  the  nations  involved,  and  by  far  the  greater  part  of 
this  expenditure  was  cared  for  by  public  loans.  Before  the 
close  of  the  year  1915  the  war  had  already  resulted  in  a 
doubling  of  the  public  debt  of  the  belligerent  nations. 


392     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Fees  and  Special  Assessments.  —  Fees  and  special  assess- 
ments closely  resemble  taxes,  but  they  are  of  much  less 
significance  in  the  fiscal  system.  A  fee  is  a  "  payment  made 
to  the  state  on  the  occasion  of  some  specific  service  rendered 
by  the  state  to  the  citizen,  —  the  service,  hoivever,  being  non- 
commercial in  character"  The  payment  demanded  for 
recording  a  deed  or  mortgage  is  a  fee ;  so,  also,  is  any  court 
charge,  or  a  charge  for  a  teacher's  certificate,  a  marriage 
license,  etc.  A  special  assessment,  which  is  even  more 
like  a  regular  tax,  may  be  defined  as  "a  compulsory  con- 
tribution, levied  in  proportion  to  the  special  benefits  derived, 
to  defray  the  cost  of  a  specific  improvement  to  property,  under- 
taken in  the  public  interest."  Thus  American  cities  often 
provide  for  the  paving  of  particular  streets  by  laying  part 
of  the  cost  upon  the  entire  municipality  in  the  form  of  a  tax, 
and  placing  the  remainder  of  the  burden,  in  the  form  of  a 
special  assessment,  upon  the  owners  of  "  abutting  "  properties 
in  proportion  to  the  value  of  such  properties.  In  this 
way  the  entire  city  helps  pay  for  the  benefit  conferred  upon 
the  city,  while  the  people  living  on  the  street  or  owning 
business  property  there  pay  for  the  special  benefit  which 
the  improvement  has  conferred  upon  them.  The  custom 
of  mimicipal  improvement  by  special  assessment  has  been 
developed  much  farther  in  the  United  States  than  in 
Europe. 

Taxes.  —  The  most  important  and  most  regular  source  of 
public  revenues  is  taxation.  Taxes  are  onesided  transfers 
of  valuxible  things,  exacted  by  public  authority,  chiefly  from 
citizens,  but  also  from  other  persons  within  its  reach,  according 
to  some  general  rule,  in  order  to  meet  public  expenses  and  to 
accomplish  other  public  ends.  Taxes  differ  from  fees  and 
special  assessments,  therefore,  chiefly  in  that  there  is  no 
attempt  to  proportion  the  tax  to  the  benefit  conferred  upon 


EXPENDITURE   AND   REVENUE  393 

the  individual.  The  justification  of  taxation  lies  simply 
in  the  necessity  of  maintaining  the  state.  If  the  people 
are  to  have  a  state  they  must  pay  for  it,  and  no  better  means 
than  taxation  has  yet  been  discovered. 

What  is  a  Just  Tax  ?  —  No  question  regarding  taxation 
has  been  more  earnestlj^  discussed  than  the  question  of 
what  constitutes  justice  in  taxation.  One  answer  that  is 
commonly  heard  is  that  taxes  should  be  proportioned  (1)  to 
benefits  derived.  But  it  is  utterly  impracticable  to  attempt 
to  say  what  proportion  of  the  general  benefits  of  government 
accrue  to  particular  individuals.  And  even  if  tjiis  were 
practicable,  it  would  probably  be  found  in  many  cases  that 
the  greatest  relative  benefits  are  enjoyed  by  the  weak  and 
the  poor,  who  are  least  able  to  bear  the  tax  burden. 

The  Faculty  Theory.  —  A  theory  more  generally  accepted 
by  economists  to-day  is  that  taxation  (2)  should  be  pro- 
portioned to  ''faculty,"  or  ability  to  pay.  But  even  when 
this  rule  has  been  accepted,  there  remains  the  difficult 
question,  How  is  faculty  to  be  measured?  One  answer  has 
been  that  we  may  measure  ability  by  (a)  consumption;  but 
it  is  evident  that  the  consumption  of  the  poor  is  out  of  all 
proportion  to  their  ability  to  bear  the  burdens  of  the  state. 
Another  suggested  basis  of  measurement  (6)  is  property; 
but  property  differs  widely  in  its  productiveness,  and,  more- 
over, many  persons  with  little  property  have  large  incomes, 
and  therefore  great  ability  to  bear  taxation.  Perhaps  the 
least  objectionable  measure  of  ability  is  afforded  (c)  by  in- 
come, though  even  here  we  must  note  that  incomes  differ 
in  permanence  and  security,  and  that  equal  incomes  are 
called  upon  to  support  very  unequal  numbers  of  persons.  It 
is  not  possible  to  reach  a  single  perfectly  just  basis  of  ap- 
portionment of  the  tax  burden;  but  the  levying  of  taxes  on 
income,  with  variations  to  correct  manifest  cases  of  in- 


394     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

equity,  probably  approaches  as  near  to  ideal  taxation  as  is 
possible  to-day. 

Granting  this,  another  question  at  once  presents  itself 
for  solution.  Shall  taxes  be  laid  in  direct  proportion  to 
income,  or  shall  the  rate  be  increased  as  the  amount  of  in- 
come increases  f  The  first  method  is  called  (a)  proportional 
taxation;  the  second,  (b)  progressive  or  graduated.  Some- 
times taxes  are  neither  proportional  nor  progressive,  but 
(c)  regressive;  that  is,  the  rate  diminishes  as  the  taxed  property 
or  income  becomes  larger.  Such  taxes  every  one  admits  to 
be  unjust,  though  many  such  taxes  are  levied.  The  opinion 
of  students  everywhere  seems  on  the  whole  tending  to  favor 
progressive  rates. 

Direct  and  Indirect  Taxes.  —  In  concluding  our  discussion 
there  remains  to  be  noted  a  distinction,  frequently  seen  in 
economic  writings,  between  direct  and  indirect  taxation. 
The  meaning  attributed  to  these  terms  at  different  times  and 
by  different  writers  has  varied  widely,  but  a  common  defini- 
tion is  that  direct  taxes  are  taxes  laid  by  the  state  upon  those 
who  are  expected  to  bear  the  burden  of  them,  while  indirect 
taxes  are  expected  to  be  shifted  to  other  persons. 

Poll  taxes,  property  taxes,  income  and  inheritance  taxes 
are  usually  called  direct,  while  customs  taxes  and  excise  taxes 
are  called  indirect.  The  importer  of  goods  subject  to  duty 
pays  the  tax,  but  recoups  himself  from  the  enhanced  price 
which  he  is  able  to  charge  the  consumer  of  the  goods. 

As  taxation  is  the  most  important  single  subject  in  the 
domain  of  public  finance,  we  shall  present  a  more  detailed 
treatment  in  the  following  chapter,  in  connection  with  the 
topic  Revenues  in  the  United  States. 

The  Single  Tax.  —  Many  intelligent  citizens  of  England, 
the  United  States,  and  other  countries  are  adherents  and 
devoted  advocates  of  a  scheme  for  entirely  abolishing  taxa- 


EXPENDITURE  AND  REVENUE  395 

tion,  as  that  word  is  ordinarily  understood.  Mr.  Henry 
George,  author  of  Progress  and  Poverty,  a  man  of  wonderfully 
earnest  human  sympathies,  and  of  very  strong  and  sincere 
convictions,  gave  the  latter  part  of  his  life  to  the  advocacy 
of  the  plan,  which  he  himself  did  most  to  formulate  and 
popularize  in  modern  times.  We  can  do  no  better,  there- 
fore, than  to  explain  the  proposed  system  in  Mr.  George's 
own  words,  as  printed  in  his  paper,  the  Standard:  — 

"  The  Standard  advocates  the  abolition  of  all  taxes  upon 
industry  and  the  products  of  industry,  and  the  taking,  by 
taxation  upon  land  values,  irrespective  of  improvements,  of 
the  annual  rental  value  of  all  those  various  forms  of  natural 
opportunities  embraced  under  the  general  term.  Land. 

"  We  hold  that  to  tax  labor  or  its  products  is  to  discourage 
industry.  We  hold  that  to  tax  land  values  to  their  full 
amount  will  render  it  impossible  for  any  man  to  exact  from 
others  a  price  for  the  privilege  of  using  those  bounties  of 
nature  in  which  all  living  men  have  an  equal  right  of  use ; 
that  it  will  compel  every  individual  controlling  natural 
opportunities  to  utilize  them  by  employment  of  labor  or 
abandon  them  to  others ;  that  it  will  thus  provide  opportu- 
nities of  work  for  all  men,  and  secure  to  each  the  full  reward 
of  his  labor ;  and  that  as  a  result  involuntary  poverty  will 
be  abolished,  and  the  greed,  intemperance,  and  vice  that 
spring  from  poverty  and  the  dread  of  poverty  will  be  swept 
away." 

The  proposition  is  here  definitely  made  that  the  state 
should  take  all  of  the  pure  or  economic  rent  of  land,  and 
the  claim  is  made  in  explanation  and  justification  of  the 
policy  that  it  will  abolish  poverty.  Such  a  policy  might, 
indeed,  prevent  landowners  who  do  not  care  to  use  their 
land  from  keeping  it  out  of  the  hands  of  those  who  would  use 
it ;  but  how  it  would  effect  all  the  other  predicted  blessings 


396      ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

is  difficult  for  most  people  to  comprehend.  In  the  first 
place,  there  are,  no  doubt,  administrative  difficulties  in 
the  way  of  separating  the  pure  economic  rent  of  land  from 
the  annual  value  of  the  separable  improvements  on  the  land. 
But  apart  from  this  difficulty,  the  appropriation  of  economic 
rent  by  the  public  without  compensation  to  the  owners  does 
not  appeal  to  the  conscience  of  the  American  public  as  a  just 
thing  to  do.  No  abstract  reasoning,  based  on  "  natural 
rights,"  will  persuade  a  modern  nation  to  so  radical  a  step. 
This  honestly  and  earnestly  advocated  policy  is  only  one 
more  illustration  of  the  danger  of  basing  social  reasoning 
on  any  theory  of  ''  natural  rights." 

Some  advocates  of  the  higher  taxation  of  land  values, 
recognizing  the  unwisdom  or  injustice  of  appropriating  all 
rents  now  existing,  propose  instead  that  the  state  shall 
take,  under  the  form  of  taxation,  all  future  increments  in 
ground  rents  which  increasing  population  may  create. 
England,  Germany,  and  some  Canadian  cities  may  be  said 
to  have  moved  in  this  direction  within  recent  years,  by  lay- 
ing a  special  tax  on  increases  in  urban  rents ;  but  probably 
in  no  country  in  the  world  is  a  greater  proportion  of  incre- 
ment in  land  values  taken  for  public  purposes  than  in  those 
states  of  the  American  Union  where  land  is  taxed  according 
to  selling  value,  and  where  also  the  land  owners  pay  for  im- 
provements, either  wholly  or  in  large  part.  This  is  the 
case,  for  example,  in  Wisconsin.  It  frequently  happens 
in  American  cities  that  taxes  and  special  assessments  take 
far  more  than  the  increment  in  values  and  leave  the  owner 
with  the  unearned  decrements. 

One  argmnent  in  favor  of  the  special  tax  on  urban  land  is 
that  in  cities  it  is  easy  to  separate  economic  rent  from  the 
earnings  of  improvements,  such  as  buildings.  In  fact,  as 
has  been  stated  elsewhere  in  these  pages,  such  a  separation 


EXPENDITURE  AND   REVENUE  397 

is  frequently  made.  Even  here,  however,  it  is  well  to  pro- 
ceed very  cautiously.  Confiscation,  at  any  rate,  should 
not  be  tolerated.  If  great  and  expensive  changes  along  this 
line  should  commend  themselves  to  the  people,  the  burden  of 
the  changes  should  be  widely  diffused  throughout  the  com- 
munity by  means  of  inheritance  and  other  taxes. 

SUMMARY 

1.  Public  finance  treats  of  the  revenues  and  expenditures  of  gov- 

ernment. 

2.  Government  business  is  everywhere  the  largest  single  business, 

and  profoundly  influences  all  private  business. 

3.  Public  expenditure  in  civilized  states  has  been  rapidly  increas- 

ing, owing  both  to  the  rapid  increase  in  population  and  to 
the  widened  scope  of  government  activity. 

4.  Public  expenditures  are  for  fulfilling  the  protective,  the  com- 

mercial, the  developmental,  and  the  self-sustaining  functions 
of  government. 

5.  Public  revenues  are  derived  from  public  domains  and  industries, 

from  fees,  special  assessments,  and  taxes,  from  fines,  gifts, 
etc.,  and  from  public  loans. 

6.  Taxes,  the  chief  source  of  revenue,  are  compulsory  payments 

for  government  expenses. 

7.  A  just  tax  is  one  which  conforms  to  the  ability  of  the  taxpayer 

to  bear  the  burden. 

8.  Direct  taxes  are  intended  to  be  borne  by  those  paying  them; 

indirect  taxes  are  designed  to  be  shifted. 

9.  The  proposed  plan  of  taking  all  the  economic  rent  of  agricul- 

tural land  for  the  support  of  the  state,  is  impracticable,  and, 
unless  compensation  is  provided  for,  is  morally  indefensible ; 
special  taxation  of  urban  rents,  especially  of  future  incre- 
ments of  rent,  stands  on  a  different  footing. 

QUESTIONS  FOR  RECITATION 

1.  What  is  public  finance?    From  what  is  it  to  be  distinguished ? 

2.  What  is  the  bearing  of  public  finance  upon  the  labor  problem  ? 

3.  Why  have  public  expenditures  so  uniformly  increased  during  the 

last  century? 

4.  Classify  public  expenditures,  and  name  particular  expenditures 

falling  under  each  group. 


398     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

5.  What  classes  of  expenditure  have  shown  the  most  rapid  increase 

in  the  last  century? 

6.  What  are  fees?     Special  assessments?     Taxes?     What  are  the 

differences  among  them  ? 

7.  How  do  revenues  from  loans  differ  from  other  revenues  ? 

8.  What  is  the  justification  of  taxation?     What  are  the  theories 

regarding  just  taxation? 

9.  What  are  some  of  the  different  proposals  made  by  Single  Taxers? 

What  is  the  difference  between  them?     Discuss  the  justice 
and  practicability  of  these  proposals. 

QUESTIONS  FOR   STUDY   AND   DISCUSSION 

1.  Study  the  financial  report  of  your  own  town  or  city,  and  of 

your  own  state.     What  are  their  sources  of  revenue?  their 
objects  of  expenditure  ? 

2.  Why  are  poll  taxes  regressive  ? 

3.  How  far  do  the  debts  of  the  world  represent  reproductive  in- 

vestment ? 

4.  Name  some  proportional,  progressive,  and  regressive  taxes  in 

the  United  States  to-day. 

5.  Study  carefully  the  claims  of  the  proponents  and  opponents  of 

the  single  tax. 

LITERATURE 

Adams,  H.  C. :    The  Science  of  Finance,   §§  10,  18,  and  49,  and 

Public  Debts. 
Bastable,  C.  F. :   Public  Finance. 
Daniels,  W.  M. :    The  Elements  of  Public  Finance,  pp.  30-33  and 

pp.  36-38. 
Ely,  R.  T. :    Property  and  Contract  (for  a  discussion  of  the  single 

tax,  consult  references  in  the  index). 
Fillebrown,  C.  B. :    The  ABC  of  Taxation.     (A  presentation  of  the 

single  tax  theory.) 
George,  H. :   Progress  and  Poverty. 
Plehn,  C.  C. :  Introduction  to  Public  Finance. 
Seligman,  E.  R.  A. :   Essays  in  Taxation. 
Shearman,  Thomas  G. :   Natural  Taxation, 


CHAPTER  II 

REVENUES   IN   THE   UNITED    STATES 

I.   Federal  Revenues 

The  following  table  shows  the  Federal  revenue'classified 
by  sources  for  the  fiscal  year  ending  June  30,  1914 :  — 

Customs $292,320,015 

Internal  revenue 380,041,007 

Postal  service 287,934,566 

Miscellaneous  : 

Profits  on  coinage,  bullion  deposits, 

and  assays $  6,182,560 

Sales  of  public  lands 2,571,775 

Fees :  consular,  letters  patent,  etc.        6,774,104 
Tax  on  National  banks     ....        3,883,198 

Forest  reserve  fund 2,486,901 

Immigration  fund 5,216,150 

Other  miscellaneous 36,197,457 

62,312,145 

Public-debt  receipts 23.021,222 

Total  revenue $1,045,628,955 

Customs  Taxes.  —  As  appears  in  the  table,  the  govern- 
ment derives  a  very  large  proportion  of  its  whole  revenue 
from  customs  duties,  which  are  taxes  laid  upon  imported 
commodities.  In  earlier  days,  and  particularly  before  the 
Civil  War,  the  customs  duties  constituted  nearly  the  whole 
of  the  Federal  revenues ;  and  even  now,  in  times  of  peace, 
not  far  from  one  third  of  the  ordinary  tax  receipts  of  the 
national  government  are  from  this  source. 

399 


400     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Custom  duties  are  either  specific  or  ad  valorem.  Specific 
duties  are  duties  laid  in  proportion  to  weight  or  number,  with- 
out regard  to  value,  while  ad  valorem  duties  are  levied  in 
proportion  to  the  value  of  the  commodities  imported.  Ad 
valorem  duties  are  open  to  the  objection  that  they  offer  a 
greater  temptation  to  fraudulent  valuations,  and  hence  make 
more  difficult  the  work  of  the  customs  officers.  Specific 
duties,  on  the  other  hand,  while  they  can  be  more  easily  ad- 
ministered, are  open  to  the  serious  objection  that  they  im- 
pose a  relatively  heavier  burden  upon  less  valuable  goods 
of  any  class. 

Although  long  use  and  practical  convenience  have  given 
the  customs  duties  a  large  and  apparently  secure  place  in 
our  financial  system,  there  are  certain  evident  objections  to 
such  taxation  which  must  be  borne  in  mind  by  the  student  in 
considering  the  general  question  of  tax  reform.  These 
objections  call  for  explanation. 

Objections  to  Customs  Duties.  —  1.  Their  Regressive 
Character.  —  First  of  all,  it  is  an  objection  against  such  taxes 
that  they  are  regressive  in  character.  Customs  duties,  to 
yield  a  large  revenue,  must  be  levied  upon  goods  of  very 
general  consumption,  and  moreover  fiscal  reasons  lead  to  the 
imposition  of  high  rates  upon  such  commodities.  But  it  is 
for  precisely  such  commodities  that  people  of  only  moderate 
incomes  spend  a  greater  proportion  of  their  income  than  do 
the  rich.  Therefore  the  tax  is  regressive;  it  lays  a  dis- 
proportionate burden  upon  the  poor  people  and  people  of 
moderate  means. 

2.  Effect  upon  Industry.  —  In  the  second  place,  such  taxes, 
if  they  are  "  protective  "  in  character,  seem  to  interfere 
with  what  may  be  regarded  as  the  "  natural  "  disposition 
of  the  nation's  labor  and  capital.  Moreover,  it  regularly 
happens  that  such  a  tariff  takes  much  more  from  consmners 


REVENUES   IN    THE    UNITED  STATES  401 

than  ever  finds  its  way  into  the  Federal  treasury,  since 
only  imported  goods  yield  a  revenue,  while  all  goods,  im- 
ported and  domestic,  are  sold  at  a  higher  price  to  the  con- 
sumer. If  the  tax  be  not  protective,  then,  to  meet  the  re- 
quirements of  the  revenue,  goods  must  be  brought  in  at 
certain  ports  or  made  in  certain  ways,  so  that  customs  and 
excise  officials  can  inspect  and  see  that  the  state  is  not  de- 
frauded; and,  even  with  the  system  of  bonding,  —  where 
commodities  are  placed  in  bonded  warehouses,  from  which 
they  are  only  removed  and  pay  the  tax  when  they  are  about 
to  be  sold, —  some  interval  must  elapse  between  the  payment 
and  its  recovery  in  the  price  charged  to  the  consumer,  and 
some  interest  must  be  lost  on  the  capital  locked  up  for  that 
period. 

3.  Inelasticity.  —  The  two  objections  just  explained  are 
based  chiefly  upon  social  and  industrial  considerations.  A 
third  objection  is  directly  financial  in  its  nature.  One  mark 
of  a  good  tax  is  its  elasticity.  Now  few  taxes  are  more  in- 
elastic than  customs  duties.  Frequent  changes  of  tariff 
rates  are  fatal  to  that  stability  of  industrial  conditions  with- 
out which  business  cannot  prosper.  Unusual  demands  upon 
the  Federal  purse  cannot  be  met  by  changes  in  the  tariff 
schedules. 

4.  Uncertainty.  — ■  And  hence  results  still  a  fourth  ob- 
jection, also  financial  in  character.  It  is  a  serious  defect  of 
such  taxes  that  they  are  likely  to  yield  least  when  govern- 
ment need  is  greatest.  A  war,  calling  for  unusual  expendi- 
tures, is  certain  to  curtail  international  trade  and  hence 
revenues  from  customs  duties.  Moreover,  recurrent  in- 
dustrial depressions  affect  most  seriously  the  government's 
receipts  from  this  source. 

Excise  Taxes.  —  Excise  duties  or  taxes  are  those  levied 
directly  upon  certain  classes  of  goods  produx^ed  within  the 
2d 


402      ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

country.  These  taxes  are  also  known  as  Internal  Revenue 
taxes.  The  method  of  collecting  excise  taxes  has  been  de- 
veloped into  a  simple  and  effective  system.  Producers  of 
tobacco,  cigars,  whiskey,  etc.,  must  pm*chase  revenue  stamps 
from  the  government  and  put  these  upon  the  packages  con- 
taining the  goods  in  such  a  way  that  opening  the  packages 
will  destroy  the  stamps. 

Excise  taxes  are  regularly  classed  with  customs  duties  as 
indirect  taxes,  because,  while  they  are  laid  directly  upon 
producers,  it  is  supposed  that  they  will  be  shifted  to  con- 
sumers in  the  enhanced  price  of  the  commodity.  In  some 
other  respects,  too,  excise  taxes  are  open  to  the  same  ob- 
jections that  lie  against  customs  duties.  They  are  regressive 
in  character,  though,  as  they  are  laid  chiefly  upon  liquors  and 
tobacco,  the  injustice  of  their  regressive  character  is  less 
grave.  But,  on  the  other  hand,  excise  taxes  have  proved 
very  productive,  and  they  offer  relatively  little  difficulty  in 
collection.  Moreover,  they  form  a  more  reliable  source  of 
revenue  than  do  customs  duties,  in  that  they  fluctuate  less 
in  times  of  war  and  in  periods  of  industrial  depression. 

Mention  has  been  made  of  the  regressive  character  of 
customs  duties  and  excise  taxes.  It  must  be  remembered, 
however,  that  these  taxes  are  only  two  features  in  modern 
systems  of  taxation.  It  is  quite  possible  that  taxes  of  these 
kinds  may  be  balanced  by  income  and  property  taxes  resting 
more  heavily  upon  the  rich  than  upon  the  poor,  so  that  the 
inequality  of  one  kind  will  be  offset  by  the  inequality  of  a 
different  kind.  We  have  to  consider  in  the  United  States 
not  only  the  Federal  taxes,  but  state  and  local  taxes,  before 
we  can  tell  whether  the  taxes  are  just  or  unjust  in  the  way 
they  affect  different  classes  in  the  community. 

Taxes  on  Transactions.  —  In  times  of  urgent  need,  as  in 
the  War  of  1812,  the  Civil  War,  the  war  with  Spain,  and 


REVENUES   IN    THE    UNITED  STATES  403 

during  the  great  European  war,  the  Federal  government  has 
imposed  taxes  upon  various  sorts  of  transactions.  Thus  the 
Act  of  1898  imposed  *' stamp"  taxes  on  bank  checks,  tele- 
grams, freight  and  express  receipts,  transfers  of  stocks  and 
bonds,  bills  of  exchange,  etc.,  the  method  of  collecting  the  rev- 
enue being  similar  to  that  described  in  the  case  of  excise  taxes. 

Though  such  taxes  may  be  made  the  source  of  large  and 
easily  collected  revenue,  they  are  not  likely  to  be  resorted 
to  except  in  times  of  emergency,  since  their  generM  effect 
is  greatly  to  impede  business;  and  a  check  on  business 
activity  soon  lessens  the  revenue  from  other  sources.  In 
most  cases  taxes  on  transactions  are  borne  by  the  consumer  or 
pm-chaser,  though  in  some  cases,  if  the  tax  be  a  small  one, 
the  producer  or  seller  will  "  pocket  the  loss." 

The  Federal  Income  Tax.  —  The  United  States  now 
derives  a  substantial  proportion  of  the  Federal  revenues 
from  income  taxation.  This  was  made  possible  by  the 
amendment  to  the  Federal  constitution  adopted  in  1913. 
Before  that  time,  according  to  the  interpretation  of  the 
constitution  by  the  Supreme  Court,  an  income  tax  that 
included  a  tax  upon  income  derived  from  land,  must,  as 
being  a  direct  tax,  be  apportioned  among  the  states  accord- 
ing to  their  population.  But  a  tax  so  apportioned  was  too 
manifestly  unjust  to  be  considered.  The  constitutional 
amendment  which  made  a  fair  Federal  income  tax  possible 
was  finally  secured  by  the  people  after  a  generation  of  ex- 
cited and  expensive  agitation  and  effort. 

The  present  federal  income  tax  law  is  incorporated  in  the 
Revenue  Act  of  September  8,  1916.  The  Act  distinguishes 
two  classes  of  incomes,  those  of  persons  and  those  of  corpora- 
tions. A  tax  of  two  per  cent  is  laid  upon  the  net  incomes  of 
corporations  of  nearly  all  kinds.  The  same  "  normal  "  tax 
of  two  per  cent  is  laid  upon  all  personal  net  incomes  above 


404     ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

$3000  a  year;  but  the  head  of  a  family,  a  married  man 
living  with  his  wife  or  a  married  woman  living  with  her 
husband  is  entitled  to  an  exemption  of  an  additional  $1000 
of  income.  This  exemption  cannot  be  claimed  by  both,  and 
only  $4000  of  the  aggregate  income  of  man  and  wife  can  be 
exempt  from  taxation  when  they  are  living  together. 

So  much  of  personal  income  in  excess  of  $3000  or  $4000 
as  is  derived  from  the  earnings  of  corporations,  which  pay 
the  two  per  cent  corporation  tax,  is  also  free  from  the  normal 
personal  income  tax  of  two  per  cent. 

In  addition  to  the  normal  tax  of  two  per  cent,  personal 
net  incomes  above  $20,000  pay  a  graded  "  supertax  "  or 
additional  tax  as  follows :  — 

Incombb  Rate  of  Sttpebtax 

$20,000-      40,000 1% 

40,000-     60,000 2% 

60,000-     80,000 3% 

80,000-    100,000 4% 

100,000-    150,000 5% 

150,000-    200,000 •    .     .     .  6% 

200,000-    250,000 7% 

250,000-    300,000 8% 

300,000-    500,000 9% 

500,000-1,000,000 10% 

1,000,000-1,500,000 11% 

1,500,000-2,000,000 12% 

2,000,000-  13% 

An  illustration  may  aid  the  student  in  understanding  the 
operation  of  the  tax.  Let  us  suppose  the  case  of  a  married 
man  having  a  net  income  of  $1,000,000  a  year  obtained 
from  earnings,  bonds,  mortgages,  and  similar  investments. 
His  income  is  taxed  as  shown  in  the  accompanying  table. 
The  net  tax  rate  on  the  whole  income,  obtained  by  dividing 
the  whole  tax  by  the  whole  income,  would  m  this  case 
equal  10.292  per  cent. 


REVENUES   IN   THE    UNITED  STATES  405 

$4,000  exempt 

4,000-      20,000  at  2%  .......$        320 

20,000-      40,000  at  3%  600 

40,000-      60,000  at  4%  800 

60,000-     80,000  at  5%  1,000 

80,000-    100,000  at  6%  1,200 

100,000-    150,000  at  7%  3,500 

150,000-    200,000  at  8%  4,000 

200,000-    250,000  at  9%  4,500 

250,000-    300,000  at  10% 5,000 

300,000-    500,000  at  11% 22,000 

500,000-1,000,000  at  12% 60,000 


Total  tax $102,920 

In  the  first  complete  year  of  the  operation  of  the  law  1914- 
1915,  174,205  corporations  paid  a  tax  of  $38,986,952,  and 
357,515  individuals  paid  personal  incomes  taxes  aggregating 
about  $41,046,162. 

The  numbers  of  personal  incomes  reported  for  different 
income  classes  during  the  first  complete  tax  year  are  shown 
in  the  following  table :  — 

Net  AmnjAii  Incomb  Number  Rbpobtbd 

$500,000  and  over 174 

250,000  to  500,000 346 

100,000  to  250,000 1,828 

75,000  to  100,000 1,501 

50,000  to    75,000 3,660 

20,000  to    50,000 23,348 

15,000  to    20,000 15,790 

10,000  to    15,000 34,141 

5,000  to    10,000 127,448 

4,000  to      5,000 66,525 

3,000  to      4,000 82,754 

It  thus  appears  that  about  one-third  of  one  per  cent  of 
the  American  people  have  annual  incomes  of  $3000  or  more  a 
year.  Apparently  less  than  one  per  cent  of  the  families 
are  living  on  such  incomes. 


406     ELEMENTARY   PRINCIPLES  OP  ECONOMICS 

The  Income  Tax  in  Practice.  —  In  considering  the  claim 
for  and  against  income  taxation,  we  are  aided  by  the  wide 
and  varied  experience  of  other  nations  in  the  use  of  this  tax. 
First  of  all,  it  is  to  be  noted  that  in  Australasia,  England, 
Italy,  Germany,  and  other  countries  in  which  the  income 
tax  has  been  given  a  trial,  (1)  experience  has  jitstified  this 
form  of  taxation,  according  to  the  majority  opinion  of  those 
who  have  considered  the  matter.  Moreover,  it  is  especially 
noteworthy  that  income  taxation  (2)  gains  in  economy  and 
prodiictiveness,  and  wins  increasing  approbation  as  the  years 
go  by. 

In  the  third  place,  (3)  there  is  little  question  that  an  in- 
come tax,  assuming  it  to  be  fairly  enforceable,  conforms  al- 
most perfectly  to  the  ideal  of  taxation,  that  men  shoidd  pay  the 
expenses  of  the  state. m  proportion  to  their  ''faculty'^  or 
ability,  since  income  is  by  all  means  the  best  single  mark  of 
such  ability.  Where  the  tax  is  applied  uniformly  upon 
all  kinds  of  income,  (4)  it  cannot  be  shifted  easily,  and  the 
tax  on  rent  and  monopoly  privileges  of  all  sorts  cannot  be 
shifted  at  all.  This  itself  is  a  strong  recommendation  of 
the  tax.  (5)  Moreover,  income  taxation  lends  itself  easily  to 
the  use  of  the  principle  of  progression,  by  which  the  regressive 
character  of  other  taxes  may  be  offset. 

Exemption.  —  It  is  usual,  as  in  the  present  federal  in- 
come tax,  to  exempt  a  certain  minimum  of  income  from 
taxation,  for  the  reason  that  possessors  of  small  and  moderate 
incomes  already  pay  a  disproportionate  share  of  other  taxes, 
and  for  the  further  very  practical  reason  that  the  expense  of 
collecting  the  tax  on  such  incomes  bears  too  high  a  propor- 
tion to  the  return  to  render  such  taxation  economical. 

The  Federal  Inheritance  Tax.  —  The  Revenue  Act  of 
September  8,  1916,  in  addition  to  increasing  the  rates  of 
the  income  tax,  imposed  an  inheritance  tax.    During  the 


REVENUES   IN    THE    UNITED   STATES  407 

Civil  and  Spanish-American  wars  we  had  short-lived  Federal 
inheritance  taxes,  as  emergency  measures.  Unlike  those 
taxes,  the  present  Federal  inheritance  tax  law  is  designed  to 
be  a  permanent  feature  of  our  revenue  system. 

This  tax  is  imposed  upon  the  transfer  of  the  entire  net 
estate  of  every  decedent,  whether  a  resident  or  a  non-resident 
of  the  United  States.  The  "  net  estate  "  upon  which  the 
tax  is  imposed  is  the  gross  estate  of  the  decedent,  less  deduc- 
tions for  the  expenses  of  administration,  debts,  and  losses, 
and  an  exemption  in  all  cases  of  $50,000,  except  in  estates 
of  non-residents.    The  rates  are  as  follows :  — 


Amount  op  "  Net  Estate  " 

(Gross  estate  less  permitted  deduc-                                           Tax  Phb  Cent 
tion  and  an  exemption  of  $50,000) 

Up  to  $50,000 1 

50,000-    150,000 2 

150,000-    250,000 3 

250,000-    450,000 4 

450,000-1,000,000 5 

1,000,000-2,000,000 6 

2,000,000-3,000,000 7 

3,000,000-4,000,000 8 

4,000,000-5,000,000 9 

5,000,000  and  up 10 


II.  State  Revenues 

We  come  next  to  taxation  by  the  commonwealths,  and  in 
beginning  it  may  be  well  to  study  the  following  table  showing 
the  revenues  of  New  York  State  for  the  fiscal  year  ending 
September  30, 1913,  as  given  in  the  report  of  the  State  Comp- 
troller for  1914 :  — 


408     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Direct  taxes $11,154,114.25 

Indirect  taxes  (a  purely  administrative  classifica- 
tion, not  to  be  regarded  in  the  sense  of  the  defini- 
tion given  in  the  preceding  chapter) 

Excise 9,280,681.65 

Corporations 10,910,529.13 

Organization  of  corporations    .  455,512.50 

Inheritance  tax 12,724,236.86 

Stock  transfer 2,927,810.88 

Miscellaneous 4,083,019.81 

40,381,990.83 
Non  resident  taxes 50,434.18 

51,586,339.26 

Sales  of  public  lands 42,729.45 

Fees  and  other  receipts  of  public  ofl&cers  ....  638,204.01 

Fines,  fees,  duties,  etc 387,465.19 

Miscellaneous  receipts  from  institutions  ....  754,431.92 

Other  receipts 1,716,790.96 

Total  to  general  fund .  55,125,960.79 

Receipts  for  special  funds 37,654,068.69 

Total  receipts  into  treasury  from  all  sources  .     .  92,780,029.48 

Poll  Taxes.  —  One  antiquated  source  of  revenue  which 
does  not  appear  in  the  table  is  the  poll  tax.  Many  states 
levy  poll  or  capitation  taxes,  to  be  paid  into  the  state 
or  local  treasury.  Poll  taxes  are  taxes  usually  levied  at  a 
uniform  rate  upon  practically  all  male  citizens.  They  are 
difficult  of  collection,  in  the  highest  degree  inequitable,  and 
are  gradually  disappearing  from  the  financial  systems  of 
advanced  governments. 

General  Property  Tax.  —  The  greater  part  of  the  revenue 
entered  in  the  table  under  the  name  Direct  State  Taxes  is 
from  a  general  property  tax,  a  tax  which  is  levied  —  in  theory 
—  upon  nearly  all  property,  real  and  personal,  on  a  uniform 
basis  of  assessment  and  at  a  uniform  rate.  The  importance 
of  this  tax  appears  in  the  fact  that  revenue  derived  from  it 
in  the  commonwealths  of  the  United  States  constitutes 
more  than  one  half  of  the  state  and  local  revenues,  and  nearly 


REVENUES   IN   THE    UNITED   STATES  409 

one  third  of  the  total  revenues  of  the  country,  —  national, 
state,  and  local.  And  yet  all  economists  who  have  written 
upon  the  subject,  and  nearly  all  state  officers  who  have  to 
do  with  the  administration  of  the  tax,  have  not  been  able 
to  speak  of  it  otherwise  than  in  terms  of  severe  condemna- 
tion. Naturally,  then,  there  is  now  a  strong  tendency  to 
work  away  from  this  form  of  taxation.  Some  of  the  many 
serious  faults  which  the  general  property  tax  has  everywhere 
shown  call  for  comment  and  explanation.  ^ 

Though  the  method  of  assessment  and  apportionment  differs 
in  many  details  among  the  states,  it  is  the  usual  custom  for 
assessors  in  each  community  to  prepare  complete  statements 
of  all  or  nearly  all  kinds  of  taxable  property  owned  by  the 
people  of  the  community.  In  some  states  the  assessors 
receive  from  all  residents  sworn  '*  lists  '*  of  property  owned 
and  subject  to  tax.  By  the  terms  of  the  law,  the  property 
is  supposed  to  be  rated  at  its  true,  full  value,  though  by  the 
acknowledged  practice  of  assessors  and  courts  of  review,  the 
real  rates  vary  widely  from  state  to  state,  and  even  from 
community  to  community.  On  the  basis  of  the  property 
valuations  thus  made  the  state  and  local  governments,  — 
county  and  town,  —  levy  direct  taxes  at  a  rate  fixed  from 
year  to  year  according  to  the  fiscal  needs.  The  tax  is  then 
collected  byJocal  officers,  and  of  the  whole  amount  the  por- 
tion levied  by  the  county  and  state  is  passed  on  to  the  des- 
ignated officers  after  each  minor  political  division  has  set 
aside  its  share. 

1.  Unjmt  Apportionment. — The  first  of  the  defects  of 
the  tax  appears  in  the  apportionment  of  the  state's  share  of 
the  tax.  Each  community  has  a  narrow,  selfish  interest  in 
reducing  its  valuation  in  order  that  it  may  escape  its  just 
share  of  the  tax.  In  this  sordid  struggle  of  community 
against  community,  assessments  are  made  to  vary  all  the 


410      ELEMENTARY   PRINCIPLES   OF   ECONOMICS 

way  from  10  to  90  per  cent  of  the  true  values.  The  same 
mean  struggle  is  especially  frequent  between  city  and  country 
districts.  To  correct  the  evil,  state  boards  of  equalization 
or  state  tax  commissions  have  usually  been  appointed. 
Wisconsin  seems  to  have  succeeded  better  by  this  method 
in  lessening  the  inequities  of  assessment  in  the  general  prop- 
erty tax  system  than  any  other  state. 

2.  Inequity  as  between  Realty  and  Personalty.  —  In  the 
second  place,  the  general  property  tax  has  proved  grossly 
inequitable  in  laying  an  undue  proportion  of  its  burden  upon 
real  property,  allowing  various  forms  of  personal  property 
to  escape  with  a  slight  tax  or  with  no  tax  at  all.  A  secondary 
result  of  this  inequity  is  that  the  rural  districts  bear  a  dis- 
proportionate burden,  since  the  greater  part  of  the  tax-escap- 
ing personalty  is  owned  by  the  wealthy  citizens  of  our  cities. 

3.  Inequalities  of  City  Assessments.  —  Very  similar  to  the 
preceding  evils  is  the  further  injustice  wrought  by  the  tax 
through  the  disproportionate  assessment  of  the  pieces  of 
real  estate  in  cities.  Several  state  tax  commissions  have 
found  and  reported  that  in  the  case  of  city  properties  the 
proportion  between  the  assessed  value  and  the  real  value 
quite  regularly  varies  inversely  as  the  value  of  the  property. 
Thus  in  one  case  it  was  found  that  some  of  the  most  valuable 
properties  were  assessed  at  only  about  one-tenth  of  the  real 
value,  while  properties  of  httle  value  were  regularly  assessed 
at  from  five  to  eight  tenths  of  their  value.  This  evil  has 
been  considerably  lessened  in  recent  years. 

4.  Temptation  to  Dishonesty.  —  It  follows  from  the  evils 
already  described  that  the  general  property  tax  leads  to  a 
shocking  amount  of  dishonesty,  perjury,  bribery,  and  other 
forms  of  corruption.  Indeed,  as  one  writer  has  expressed 
it,  "  The  general  property  tax  has  gone  far  toward  making 
perjury  respectable  and  even  virtuous." 


REVENUES   IN   THE    UNITED  STATES  411 

Inasmuch  as  the  general  property  tax  has  been  condemned 
by  nearly  all  students  of  finance  and  by  financial  administra- 
tors, we  should  all  welcome  the  present  tendency  on  the  part 
of  the  states  to  turn  to  other  forms  of  taxation.  In  several 
commonwealths  the  state  governments  have  entirely  or 
nearly  abandoned  the  general  property  tax,  leaving  it 
chiefly  to  the  smaller  political  divisions ;  and  other  common- 
wealths are  moving  in  the  same  direction. 

Corporation  Taxes.  —  Partly  owing  to  the  proved  injustice 
of  the  general  property  tax,  but  partly  also  owing  to  the 
recent  great  growth  of  the  corporate  form  of  business  enter- 
prise, there  has  been  in  the  last  quarter  of  a  century  a  con- 
siderable development  along  the  line  of  taxation  of  corpora- 
tions. In  some  cases,  as  in  New  York,  there  are  two  taxes 
thus  laid,  one  upon  the  organization  of  such  corporations, 
and  another  upon  their  annual  business.  It  has  been  found 
much  easier  to  reach  the  revenues  of  such  businesses  directly 
than  to  reach  them  through  the  taxation  of  the  stocks  and 
bonds  of  the  corporations  in  the  hands  of  individual  owners. 
New  York,  Pennsylvania,  Vermont,  Wisconsin,  and  Massa- 
chusetts are  among  the  states  that  have  come  nearest  to 
abandoning  the  general  property  tax,  and  developing  in 
its  stead  taxation  of  corporations. 

License  Taxes.  —  Another  form  of  state  taxation  that 
has  undergone  a  considerable  development  in  recent  years  is 
that  of  business  licenses.  When,  as  is  the  case  in  our  South- 
ern states,  licenses  are  required  for  many  different  kinds  of 
business,  serious  disturbance  to  business  results.  But 
much  may  be  said  in  favor  of  a  system  of  taxing  by  license 
a  few  industries  which  it  is  generally  believed  the  state 
should  regulate.  The  most  important  of  such  license  taxes 
are  those  laid  on  the  sale  of  liquor.  The  state  of  New 
York,  which  divides  the  proceeds  from  liquor  licenses  between 


412     ELEMENTARY   PRINCIPLES  OF   ECONOMICS 

the  state  and  the  community,  received  $9,280,681.65  as 
its  share  of  such  revenue  in  the  fiscal  year  1913. 

Inheritance  Taxation.  —  Still  another  form  of  taxation 
to  which  increasing  resort  has  been  had  in  recent  years  is 
that  of  inheritances,  collateral  and  direct.  In  the  levying  of 
inheritance  taxes,  or  "  succession  duties,"  there  are  many 
and  wide  differences  of  detail  which  we  cannot  stop  to  con- 
sider. In  many  cases  such  taxes  are  progressive  or  graduated 
on  a  twofold  basis,  according  to  remoteness  of  relationship 
and  according  to  size  of  bequest.  Thus,  a  small  bequest 
to  a  wife  or  son  or  daughter  would  be  taxed  at  the  lowest 
rate,  while  the  bequest  of  a  large  fortune  to  distant  relatives 
or  strangers  in  blood  would  bear  the  heaviest  burden.  This 
form  of  taxation  is  winning  increasing  favor  from  economists 
and  from  statesmen,  both  on  account  of  its  conformity  to  the 
"  faculty  "  theory  of  taxation,  and  because  of  its  practical 
ease  and  certainty  of  collection.  The  large  part  which  the 
tax  already  plays  in  the  finances  of  New  York  State  is  shown 
in  the  table.  Thirty-nine  commonwealths  raise  a  part  of 
their  revenue  from  a  tax  on  collateral  inheritance,  and  of 
these  states  twenty-eight  also  tax  direct  inheritance.  It 
is  to  be  noted  further  that  a  majority  of  the  states  have 
adopted  the  principle  of  progression  in  levying  the  tax. 

in.  Local  Revenues 

Local  areas  of  administration  in  the  United  States  have 
usually  relied  in  the  main  upon  the  same  taxes  which  are 
levied  by  the  state  governments.  Thus,  as  has  been  ex- 
plained above,  the  general  property  tax  is  levied  at  a  rate 
which  represents  the  contribution  of  the  taxed  property  to 
town,  county,  and  state  governments.  Similarly,  the  local 
governments  are  usually  allowed  a  share  of  the  revenue  from 


REVENUES  IN   THE   UNITED  STATES  413 

liquor-license  taxation.  Municipalities  also  at  times  have 
their  independent  license  system  for  hucksters,  etc.,  though 
this  system  usually  has  for  its  main  purpose  the  regulation 
of  such  business. 

Revenue  from  Franchises.  —  One  form  of  revenue  which 
American  cities  have  been  too  prone  to  neglect  is  now  re- 
ceiving increasing  attention.  Private  municipal  service 
corporations  enjoy  very  valuable  privileges  under  their 
municipal  franchises,  and  they  should  be  made  to  pay  for 
these  franchises  all  that  they  are  worth;  that  is,  the  capi- 
talization of  their  earning  power,  less  the  actual  capital 
invested  with  an  extra  allowance  for  the  regular  risks  of  the 
business.  Some  cities  have  been  able  to  manage  such  mu- 
nicipal enterprises  for  themselves  with  great  profit,  and  it  is 
not  improbable  that  this  method  will  be  adopted  more 
generally  as  American  municipalities  become  more  honest 
and  businesslike. 

Receipts  and  Balances  All  Cities 

Classified  by  source^  as  receipts  from : 

General  property  taxes $570,830,861 

Special  property  taxes 12,598,628 

Poll  and  occupation  taxes 1,792,358 

Business  taxes 52,348,721 

Non-business  license  taxes 4,402,375 

Special  assessments        79,890,321 

Fines,  forfeits  and  escheats 4,449,361 

Subventions  and  grants 36,141,199 

Donations,  gifts,  and  pension  assessments      .     .     .  3,753,720 

Earnings  of  general  departments 22,547,201 

Highway  privileges         15,069,314 

Rents  of  investment  properties        11,286,954 

Interest        28,715,919 

Earnings  of  public  service  enterprises      ....  96,558,379 

Water  supply  systems          77,465,508 

AU  other       19,092,871 

Total  receipts,  including  non-revenue  receipts  and 

cash  balances $2,381,103,700 


414    ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

Rkcsipts  and  Balancbb  All  Cirras 

The  per  capita  receipts  for  the  same  year  were  as  follows : 

All  revenues $30.17 

Property  taxes 18.72 

Other  taxes 1.88 

Special  assessments 2.56 

Fines,  forfeits  and  escheats 0.14 

Subventions,  grants,  donations,  gifts,  and  pension  assess- 
ments               1.28 

Earnings  of  general  departments ,        0.72 

Highway  privileges,  rents,  and  interest 1.77 

Earnings  of  public  service  enterprises 3.10 

The  preceding  table  prepared  from  "  The  Financial  Sta- 
tistics of  Cities  having  a  Population  of  over  30,000 :  1915," 
published  by  the  Department  of  Commerce,  shows  the  sources 
from  which  American  cities  of  30,000  inhabitants  or  over 
derived  their  revenues  in  1915. 

rV.  A  Balanced  Revenue  System 

In  what  has  gone  before,  we  have  not  dwelt  upon  the 
question  whether  any  forms  of  revenue  are  particularly 
appropriate  to  different  divisions  of  our  government,  or 
whether  there  is  any  gain  in  a  balanced  system  for  the  differ- 
ent governments  considered  together.  A  moment's  re- 
flection should  convince  the  student  that  no  part  of  our 
revenue  laws  can  be  finally  judged  until  it  is  considered  in 
its  relation  to  the  whole  system.  To  emphasize  this  fact, 
it  may  be  well  to  suggest  here  a  balanced  revenue  system, 
in  which  Federal,  state,  and  local  revenues  will  be  placed  in 
the  right  relation  one  to  another. 

Federal  Revenues.  —  In  the  first  place,  it  is  to  be  noted 
that  the  Federal  Constitution  itself  prescribes  the  place  of 
customs  duties  in  the  system.  Again,  excise  taxation  could 
not  be  practiced  by  the  state  governments,  since  any  state 


REVENUES  IN   THE    UNITED  STATES  416 

that  should  begin  such  a  practice  would  promptly  drive  the 
taxed  production  into  the  jurisdiction  of  other  common- 
wealths. Income  taxation,  now  firmly  established,  is  also 
preferably  a  source  of  Federal  revenue.  To  these  sources  of 
Federal  revenue  may  be  added  the  taxes  on  transactions, 
though  these  should  be  rarely  and  sparingly  levied;  and 
perhaps  a  light  taxation  of  interstate  commerce,  which  would 
be  a  peculiarly  appropriate  source  of  Federal  revenue,  and 
might  offer  an  opportunity  for  the  regulation  of  interstate 
business.  It  is  to  be  hoped  that  in  coming  years  income 
taxation  will  play  relatively  a  larger  part,  and  customs  and 
excises  a  smaller  part  in  our  Federal  system. 

State  Taxation.  —  We  have  already  pointed  out  the  mani- 
fold inequities  of  the  general  property  tax.  There  is  no 
longer  any  question  that  it  would  be  well  for  our  common- 
wealths to  abandon  as  rapidly  as  possible  this  source  of 
revenue,  and  also  to  leave  to  the  local  governments  the  tax- 
ation of  real  property.  The  state  can  easily  develop  cor- 
poration, franchise,  and  inheritance  taxation  until  they  will 
prove  sufficient  for  state  needs.  Already  several  common- 
wealths have  made  the  change,  and  many  others  seem  pre- 
pared to  follow  them.  Under  these  forms  of  taxation, 
personal  property  will  be  taxed  more  certainly  and  more 
equitably  than  it  has  anywhere  been  taxed  under  the  general 
property  tax. 

There  are  those  also  who  would  tax  incomes  for  state 
purposes.  In  many  states  this  state  income  tax  has  been 
so  dismal  a  failure  that  the  possibility  of  success  has  been 
generally  denied,  but  in  recent  years  Wisconsin  has  met  with 
a  considerable  degree  of  success  in  levying  a  state  income  tax 
and  it  is  probable  that  other  states  in  the  future  will  achieve 
at  least  an  equal  success.  Many  difficulties  involved  in 
state  taxation  of  incomes  are  not  encountered  in  Federal 


416     ELEMENTARY   PRINCIPLES  OF  ECONOMICS 

taxation,  and  it  seems  more  advantageous,  therefore,  to 
leave  incomes  for  Federal  taxation,  and  to  reserve  inherit- 
ance taxation  for  the  states. 

Local  Taxation.  —  The  system  thus  far  outlined  would 
leave  to  the  local  governments  the  most  convenient  and  most 
appropriate  sources  for  their  revenues.  First  of  all,  the 
greater  part  of  local  expenditure  could  be  cared  for  by  a  tax 
on  land,  with  perhaps  a  distinct  tax  on  houses  and  on  forms 
of  personal  property  that  cannot  easily  evade  the  assessor, 
such  as  luxurious  consumer's  goods.  Any  remaining  need 
of  revenue  could  be  met  by  taxes  on  municipal  franchises 
or  by  receipts  from  municipal  ownership  and  management 
of  public  service  enterprises. 

Such  a  harmonious  system  as  has  been  here  suggested 
would  insure  a  greater  degree  of  equity,  elasticity,  economy, 
certainty,  and  harmony  than  now  obtains  in  our  unsystem- 
atic hit-and-miss  forms  of  taxation. 

SUMMARY 

1.  The  revenues  of  the  Federal  government  are  derived  in  great 

part  from  customs  duties,  excise  taxes,  and  the  income  tax. 

2.  Customs  duties  are  regressive,   inelastic,  and  uncertain,   and 

disturb  business ;  but  their  productiveness  gives  them  a  strong 
place  in  the  financial  system. 

3.  Excise  taxes  on  liquor  and  tobacco  are  also  regressive,  but  they 

are  less  objectionable  in  other  respects,  and  they  are  con^ 
veniently  collected. 

4.  The  income  tax  promises  to  be  a  very  desirable  part  of  the 

Federal  revenue  system. 

5.  States  have  relied  in  the  past  mainly  on  the  general  property 

tax,  which  is  unwieldy,  unscientific,  and    inequitable,   and 
leads  to  many  sorts  of  corruption. 

6.  Poll  taxes  no  longer  play  any  considerable  r61e  in  taxation. 

7.  Taxes  on  corporations,  license  taxes,  and  inheritance  taxes  are 

in  many  states  taking  the  place  of  other  forms  of  taxation. 

8.  Local  governments  now  rely  mainly  on  the  general  property 

tax  and  licence  taxation. 


REVENUES  IN   THE   UNITED  STATES  417 

9.  A  balanced  revenue  system  would  have  the  Federal  government 
supported  chiefly  by  taxation  of  incomes  and  by  customs  and 
excise  taxes ;  the  state  government,  by  corporation,  franchise, 
and  inheritance  taxes;  the  local  government  by  a  tax  on 
land,  supplemented  by  separate  taxes  on  houses,  etc.,  and 
by  franchise  taxes  or  by  revenues  from  municipal  operation 
of  public  services. 

QUESTIONS  FOR  RECITATION 

1.  What  part  of  the  Federal  revenues  comes  from  customs  duties? 

From  excise  taxes  ? 

2.  What  are  specific  duties?     Ad  valorem  duties? 

3.  State  and  explain  the  objections  to  customs  duties;   to  excise 

taxes.     Compare  the  two. 

4.  Describe  the  method  of  collecting  excise  taxes. 

5.  Discuss  the  advantages  of  income  taxation. 

6.  Describe  the  main  features  af-^;ii^ Federal  income  tax. 

7.  What  is  the  objection  to  taxing  transactions? 

8.  Describe  the  evils  of  the  egnfiaaiLiaiQperty  tax?    How  is  the 
general  property  tax  levii 


general  property  tax  levil^jj/-"^      ■ J^^^ 

9.   What  has  caused  the  recent  great  development  oMJOTperattOn 
taxation? 

10.  What  are  the  advantages  of  inheritance  taxation? 

11.  Frame  a  balanced  system  of  taxation  for  town,  state,  and  na- 

tion, and  explain  why  each  tax  is  placed  where  it  is. 

QUESTIONS  FOR   STUDY  AND  DISCUSSION 

1.  Is  the  general  property  tax  a  chief  source  of  revenue  in  your 

state?     Does  your   state  constitution   make  it   difficult   or 
impossible  to  give  up  this  form  of  taxation? 

2.  Does  a  mortgage  on  land  represent  wealth  distinct  from  the 

value  of  the  mortgaged  land  ? 

3.  Who  bears  the  tax  laid  on  houses?     On  the  rent  of  land? 

4.  Study  carefully  the  financial  reports  of  your  own  state  and 

community. 

5.  Study  the  geographical  distribution  of  the  incomes  reported  for 

the  Federal  Income  Tax. 

6.  Is  there  a  poll  tax  in  your  state?     Is  it  generally  collected? 

How  is  it  regarded? 


2b 


418    ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


LITERATURE 

Adams,  H.  C. :  The  Science  of  Finance,  Pt.  II,  Bk.  II,  Ch.  VI,  es- 
pecially §  73. 

Bastable,  C.  F. :   Public  Finance. 

Daniels,  W.  M. :  The  Elements  of  Public  Finance,  pp.  167-170  and 
pp.  186-191. 

Plehn,  C.  C. :  Introduction  to  Public  Finance,  Pt.  II,  Ch.  VIII,  §  1. 
See  also  other  references  at  close  of  preceding  chapter. 

Seligman,  E.  R.  A. :  Income  Taxation. 

Urdahl,  T.  K. :  The  Fee  System  in  the  United  States. 


NOTE  ON  FEDERAL  INHERITANCE  TAX 

The  law  of  September  8,  1916,  discussed  on  pages  406-407,  was 
amended  by  Act  of  March  3,  1917,  and  now  the  tax  on  the  estates 
of  decedents  dying  after  March  3,  1917,  is  as  follows,  the  net  estate 
remaining  unchanged :  — 


next 


1|  %  on  first 

3% 

4i% 

6% 

7h% 

9% 
10J% 
12% 


$50,000 

100,000 

100,000 

200,000 

550,000 

1,000,000 

1,000,000 

1,000,000 

1,000.000 


15  %  on  all  amounts  in  excess  of  $5,000,000 


APPENDIX    I 


SUBJECTS  FOR  ESSAYS,  DISCUSSIONS,  AND 
DEBATES 

The  following  list  is  intended  simply  to  be  suggestive. 
Students  are  advised  first  of  all  to  choose  such  subjects  for 
study  as  are  best  suited  to  the  local  environment.  Thus, 
if  the  student  lives  in  a  rural  district,  let  him  first  study 
local  land  values,  agricultural  rent,  farming  methods  and 
their  changes,  mortgage  indebtedness,  the  size  of  farms, 
the  business  character  of  farmers,  the  use  of  machinery, 
transportation  of  produce,  farmers'  organizations,  etc.,  all 
with  reference  to  his  own  neighborhood.  If  he  lives  in 
a  manufacturing  town,  let  him  study  in  the  same  way  the 
factory  problem,  —  the  extent  to  which  women  and  chil- 
dren are  employed,  wages  and  hours  of  labor,  means  of 
preventing  or  adjusting  clashes  between  employers  and 
employed,  etc.;  or  let  him  investigate  the  local  rail- 
way problem,  —  freight  rates,  safety  precautions,  acci- 
dents, etc. 

It  hardly  needs  to  be  said  that  in  selecting  subjects  for 
debate  from  the  following  list,  care  should  be  exercised  to 
choose  only  such  topics  as  offer  a  real  aflirmative  and  nega- 
tive, and  to  frame  the  question  in  such  a  way  as  to  have 
the  two  sides  well  balanced. 

419 


420  APPENDIX  I 

BIOGRAPHICAL   AND   PERSONAL 

(Especially  for  Essays) 

^  Sketch  of  the  Life  of  Adam  Smith. 
^    The  Life  Work  of  Robert  Owen. 

Benjamin  Franklin  as  a  Practical  Economist. 
Arnold  Toynbee. 
s/Karl  Marx  and  his  Theories, 
v^enry  George  and  the  Single  Tax. 

LABOR  AND  LABOR  ORGANIZATIONS 

Economic  Causes  of  the  Rise  and  Fall  of  Slavery  in  the  United 

States. 
Economic  Bearings  of  Free  Land  in  the  United  States. 
Indentured  Servitude  in  the  American  Colonies. 
The  Sweating  System  in  our  Great  Cities. 
The  Value  and  Cost  of  Child  Labor. 
Convict  Labor. 

The  Economy  of  High  Wages. 
Sunday  Labor. 

The  History  and  Prospects  of  Profit-sharing. 
Voluntary  Cooperation  in  the  United  States. 
Workingmen's  Budgets. 
Old  Age  Pensions. 

Labor  Organizations  in  the  United  States. 
Compulsory  Incorporation  of  Trade-unions. 
The  American  Federation  of  Labor. 
Compulsory  Arbitration  in  New  Zealand. 
National  Health  Insurance  in  Great  Britain. 
Industrial  Education  and  Vocational  Guidance. 
Workmen's  Compensation  and  Industrial  Safety  in  the  Uni*^ed 

States. 
Minimum  Wage  Legislation  in  the  United  States  and  Grea 

Britain. 
Systems  of  Industrial  Conciliation. 


APPENDIX  I  421 

Immigration  into  the  United  States  and  the  Proposed  Literacy 

Test. 
Methods  for  DeaHng  with  Unemployment. 
Strikes  and  Lockouts. 
The  National  Consumers'  League. 
Trade-union  Labels. 
The  National  Civic  Federation. 
Chinese  Labor  and  the  American  Standard  of  Life. 
The  Power  of  Consumers  over  Conditions  of  Employment. 
Combinations  of  Employers  and  Employees  against  the  Public. 
Government  by  Injunction. 

LAND   AND   FOOD   SUPPLY 

V/Agricultural  Rents  in  England  during  the  Nineteenth  Century. 

Tenant  Farming  in  Texas. 
,««£xtensive  and  Intensive  Farming  in  the  United  States. 

The  Relation  between  Small  Farms  and  Democracy. 

Forest  Culture  in  New  York  State. 

What  Has  Been  Done  with  our  Public  Domain  ? 

The  Possibilities  of  Irrigation  in  our  Arid  States. 

How  Great  Cities  are  Fed. 

MONEY,   BANKS,   AND   BANKING 

Money  in  Various  Climes  and  Times. 

The  Demonetization  of  Silver  in  the  United  States. 

National  and  International  Bimetallism. 

Fiat  Money  in  an  Ideal  State. 

The  English  and  American  Banking  Systems. 

Our  National  Banking  System. 

Postal  Savings  Banks. 

A  Visit  to  the  New  York  Clearing-house. 

Credit  in  Modem  Industry. 

Usury  and  Usury  Laws. 

The  Proposed  Branch  Banking  System  in  the  United  States. 


7 


422  APPENDIX  I 

The  Federal  Farm  Loan  Act,  1900. 

Financial  Panic  of  1907. 

Agricultural  Credit. 

The  Federal  Reserve  Board  and  its  Powers. 

Assets  Currency. 

COMMERCE,   MONOPOLIES,   ETCc 

The  Advance  and  Decline  of  American  Shipping. 

Ship  Subsidies. 

The  Stock  Market  and  its  Relation  to  Industry. 

The  Use  and  Abuse  of  Speculation. 

The  So-called  *' Money  Trust." 

Economic  Crises. 

Monopolies,  Old  and  New. 

Trusts,  What  They  Are  and  What  They  Do. 

Municipal  Lighting. 

The  Social  Economy  and  Waste  of  Advertising. 

The  Federal  Trade  Commission  and  its  Powers. 

TRANSPORTATION 

The  Farmer's  Interest  in  Good  Roads. 

The  Prussian  Railway  System. 

Railway  Combinations  in  the  United  States. 

The  Interstate  Commerce  Commission  and  its  Powers. 

River  and  Harbor  Bills. 

How  Railway  Rates  Should  Be  Determined. 

he  Physical  Valuation  of  Railways. 
Public  vs.  Private  Ownership  of  Public  Utilities. 
The  Effects  of  the  Panama  Canal. 

SOCIAL  PROBLEMS 


The  Influence  of  Luxury  upon  Rich  and  Poor. 
How  a  Day-laborer  with  a  Family  of  Five  Exists  in  the  Stu- 
dent's Community. 


APPENDIX  I  423 

Tenement-house  Life  in  Large  Cities. 

Working-girls'  Clubs. 

The  Economic  and  Moral  Causes  of  Poverty. 

The  Charity  that  Pauperizes. 

Immigration  and  Social  Standards. 

Child  Labor. 

TAXATION  AND   THE  TARIFF 

>^  Adam  Smith  on  Taxation. 

^  Taxes  that  Can  Be  Shifted.  •* 

Taxation  and  Perjury. 
VThe  Internal  Revenue  System. 
^The  English  Com  Laws. 

The  Protective  Tariff  on  Sugar, 
v^^he  Taxation  of  Inheritances. 

Reciprocity  and  Reciprocity  Treaties. 
^^The  Wisconsin  Tax  Commission  and  its  Powers, 
y^he  Federal  Income  Tax. 
Should  the  Tariff  be  Based  on  the  Difference  in  Labor  Cost 

Here  and  Abroad  ? 
Does  the  Protective  Tariff  Benefit  American  Labor  ? 
v  John  Stuart  Mill  on  the  Taxation  of  Land  Values. 

THE   STATE   IN   INDUSTRY 

V^Four  Views  of  the  Economic  Functions  of  Government:  An- 
archism, Extreme  Individualism,  Moderate  Individualism, 
Socialism. 

The  Relation  of  the  State  to  Industry  in  the  United  States. 

Fiscal  Monopolies  in  France. 

The  South  Carolina  Dispensary  Law. 

The  Telegraph  in  England  and  America. 

National  Workshops  in  France  in  1848. 

Ideal  Commonwealths. 

Christian  Socialism. 

The  Fabian  Socialists. 


424  APPENDIX  I 

Socialistic  Experiments  in  the  United  States. 

The  Social  Democratic  Party  in  Germany. 

Are  We  Tending  toward  Socialism  ? 

Socialism  or  Social  Reform,  Which  Shall  It  Be  ? 

Excess  Condemnation. 

Socialism  vs.  Imperialism. 

The  Brotherhood  of  Labor. 

Liberty  of  the  Press  in  the  Socialistic  State. 

Syndicalism  and  the  Industrial  Workers  of  the  World. 

GENERAL  THEORY 

-^^he  Theory  of  Value  in  Marshall  and  Bolua::BaFerk. 
^he  Malthusian  Theory  of  Population, 
v^he  Theory  of  a  Wage-fund. 
^The  "Lump  of  Labor"  Theory,  or  the  Theory  of  a  Work-fund. 

Money  and  the  Balance  of  Trade :  An  Exploded  Theory. 

A  Study  of  Human  Wants. 

Possible  Substitutes  for  Competition. 

Interesting  Cases  of  Conjunctural  Gains. 

What  are  Economic  Laws  ? 

The  Influence  of  Climate  upon  Civilization. 
wThe  Quantity  Theory  of  the  Value  of  Money. 

MISCELLANEOUS 

The  Economic  Results  of  the  Great  Plague  of  1348. 

The  Irish  Famine  of  1848. 

What  Bad  Cooking  Is,  and  What  It  Costs. 

What  Our  Community  Has  to  Pay  for  Intoxicants. 

The  Economic  Functions  of  the  Church. 

Changes  of  Fashion  in  Women's  Clothing. 

A  Study  in  Division  of  Labor.  (To  be  drawn  from  the  stu- 
dent's observation.) 

Our  National  Ash-heap.  (The  cost  to  the  nation  of  inflam- 
mable construction  of  building.) 


APPENDIX  I  425 

An  Expensive  Luxury.  (A  careful  statistical  study  of  the  cost 
of  tobacco  to  individuals  and  nations.) 

The  Cost  of  War.  (A  comparative  study  of  the  items  in  vari- 
ous national  budgets  that  are  due  to  wars  past  or  to  prepa- 
ration for  future  wars.) 


APPENDIX    II 


COURSES  OF  READING 

It  is  believed  that  both  students  and  teachers  may  de- 
rive valuable  aid  from  the  following  selected  bibliographies. 
The  first  group  in  each  case  includes  works  of  a  relatively 
untechnical  character,  and  therefore  constitutes  a  sort  of 
elementary,  **niinimum"  course  of  sp)ecial  study  of  the 
particular  topic.  The  books  mentioned  in  the  second  group 
are  in  each  case  more  advanced  and  technical,  and  may 
therefore  be  used  either  for  advanced  courses  of  study  or 
as  works  of  reference.  The  authors  would  suggest  that  a 
school  desiring  to  form  a  standard  working  library  in  Eco- 
nomics would  do  well  to  purchase  the  books  mentioned  in 
the  second  groups  in  the  order  in  which  they  are  named. 

"    f  GENERAL  ECONOMICS 

^  h  Group  1 

^Biillbckj  C.  J. :  Anlnfrf^uction  to  the  Study  of  Economics, 
Devinei*^.  T. :  Economics,  i 
Gide,  Charles :  Principles  of  Polipiccd  Economy. 
Seager,  Henry 'R. :  introduction  tai£conomic3. 
^   Taussig,  F.  W. :   Primpples  ofiMconomics,  2  vols. 

Walker,  F.  A. :   Elementary  .Course  in  Political  Economy;   also 
Briefer  Course  in  Political  Economy, 
426 


^ 


APPENDIX  II  427 


Group  2 


V Smith,  Adam:    Wealth  of  Nations  (Cannan  Edition). 

V  Marshall,  A. :  Principles  of  Economics. 

\^  Smart,  W. :  Introditction  to  the  Theory  of  Value. 

V  Ely,  R.  T. :  Property  and  Contract  in  their  Relations  to  the  Dis- 

tribution of  Wealth. 
Clark,  J.  B. :    The  Distribution  of  Wealth. 
N/Mill,   J.   S. :     The   Principles  of  Political  Economy.     (Ashley 

Edition.) 
^/llicardo,  D. :    Principles  of  Political  Economy  and   Taxation. 

(Gonner  Edition.)     (Six  chapters  in  Ashley's   Economic 

Classics.) 
Walker,  F.  A. :  Political  Economy.     (Advanced  Com-se.) 
Patten,  S.  N. :    The  Premises  of  Political  Economy. 
Hobson,  J.  A. :    The  Economics  of  Distribution. 
Commcwis,  J.  R. ;   The  Distribution  of  Wealth. 

ECONOMIC  HISTORY 

Group  1 

Ashley,  W.  J. :    Introduction  to  English  Economic  History  and 

Theory.     2  vols. 
Cheyney,  E.  P. :  InduMrial  and  Social  History  of  England. 
Beard,  C. :    The  Industrial  Revolution. 
Ely,  R.  T. :  Evolution  of  Industrial  Society. 
Coman,  Katharine :    The  Industrial  History  of  the  United  States. 
Hewins,  W.  A.  S. :  English  Trade  and  Finance. 
Price,  L.  L. :  History  of  English  Commerce  and  Industry. 
Warner,  T. :  Landmarks  of  English  Indu>strial  History. 

Group  2 

Bucher,  Carl :  Industrial  Evolution.     (Translation.) 
Hobson,  J.  A. :    The  Evolution  of  Modern  Capitalism. 
Toynbee,  Arnold :    The  Industrial  Revolution. 
Wright,  CD.:  Industrial  Evolution  of  the  United  States. 


428  APPENDIX  II 

Johnson,  E.  R.,  et  al. :   History  of  Domestic  and  Foreign  Com- 
merce of  the  United  States. 

Rand,  B. :   Selections  illustrating  Economic  History  since  1763, 

Gibbins,  H.  de  B. :  Industry  in  England. 

Cunningham,  W. :   Growth  of  English  Industry  and  Commerce, 
3  vols. 

A  Documentary  History  of  American  Industrial  Society.     10  vols. 

Rogers,  J.  E.  T. :  Six  Centuries  of  Work  and  Wages  and  A  His- 
tory of  Agriculture  and  Prices  in  England. 

Smart,  W. :  Economic  Annals  of  the  Nineteenth  Century. 

Ingram,  J.  K. :  History  of  Slavery. 

THE   HISTORY   OF   POLITICAL   ECONOMY 
Group  1 

v  Price,  L.  L. :  A  Short  History  of  Political  Economy  in  England, 
y  Haney,  L.  H. :  History  of  Economic  Thought, 

Group  2 

^  Ingram,  J.  K. :  History  of  Political  Economy.  (New  Edition 
by  Scott.) 

y  Ashley,  W.  J.  (editor) :  Economic  Classics,  including  selected 
passages  from  Adam  Smith's  Wealth  of  Nations;  six  chap- 
ters of  Ricardo's  Principles  of  Political  Economy;  selected 
passages  from  Malthus's  Theory  of  Population;  Mun's 
England's  Treasure  by  Foreign  Trade;  Jones's  Peasant 
Rents;    and  Schmoller's  The  Mercantile  System. 

y  Gide,  C,  and  Rist,  C. :  A  History  of  Economic  Doctrines, 
(Translation.) 

RENT,  LAND  NATIONALIZATION,  AND  THE  SINGLE  TAX 

Group  1 

'f  George,  Henry :   Progress  and  Poverty. 
V  Walker,  F.  A. :  Land  and  its  Rent. 
Fillebrown,  C.  B. :    The  ABC  of  Taxatim. 


APPENDIX  II  429 

Group  2 

Commons,  J.  R. :    The  Distribution  of  Wealth. 
Clark,  J.  B. :    The  Distribution  of  Wealth. 
Hobson,  J.  A. :   The  Economics  of  Distribution. 
Patten,  S.  N. :  Dynamic  Economics. 
Smart,  W. :   The  Distribution  of  Income. 

MONEY,   CREDIT,   AND   BANKING 

Group  1 

Bagehot,  W. :  Lombard  Street. 

Jevons,  W.  S. :  Money  and  the  Mechanism  of  Exchange. 

Kinley,  D. :   Money  —  A  Study  of  the  Theory  of  the  Medium  of 

Exchange. 
Scott,  W.  A. :  Money  and  Banking. 
Walker,  F.  A. :  Money y  Trade,  and  Industry. 
White,  Horace :  Money  and  Banking. 

Group  2 

Reports  of  the  National  Monetary  Commission. 

Report   of   the   Monetary    Commission   of   the   Indianapolis 

Convention. 
^Kemmerer,  E.  W. :    Money    and  Credit   Instruments    in  their 

Relation  to  General  Prices. 
Laughlin,  J.  L. :    The  Principles  of  Money  and  The  History  of 

Bimetallism  in  the  United  States. 
Dunbar,  C.  F. :    Theory  and  History  of  Banking. 
Fisk,  A.  K. :    The  Modem  Bank. 
Cannon,  J.  G. :  Clearing  Houses. 
Conant,  C.  A. :  History  of  Modern  Banks  of  Issu£. 
Sumner,  W.  G. :  History  of  American  Currency. 
Walker,  F.  A. :  International  Bimetallism. 
Willis,  H.  P. :  History  of  the  Latin  Monetary  Union. 
Van  Antwerp,  W.  C. :    The  Stock  Exchange  from  Within. 


430  APPENDIX  II 

Holdsworth,  J.  T. :   Money  and  Banking. 
^  Fisher,  Irving  :    The  Purchasing  Power  of  Mcmey. 
Hepburn,  A.  B. :   The  Contest  for  Sound  Money. 

PUBLIC   FINANCE 

Group  1 

v^  Bullock,  C.  J. :  Selected  Readings  in  Pvblic  Finance. 
Daniels,  W.  M. :  Elements  of  Public  Finance. 
Lyon,  W.  H. :  Principles  of  Taxation. 
Plehn,  CO.:  Introduction  to  Pvblic  Finance. 

Group  2 

N/ Adams,  H.  C. :   The  Science  of  Finance. 

Cohn,  G. :    The  Science  of  Finance.     (Translation.) 
^Bastable,  C.  F. :   Public  Finance. 

V  Seligman,   E.   R.   A. :    Essays  in    Taxation  and    The  Income 
Tax. 
Dewey,  D.  R. :  Financial  History  of  the  United  States. 
Noyes,  A.  D. :    Thirty  Years  of  American  Finance. 
Taussig,  F.  W. :    The  Tariff  History  of  the  United  States. 
West,  Max  :    The  Inheritance  Tax. 

Howe,  F.  C. :    Taxation  and  Taxes  in  the  United  States  under 
the  Internal  Revenue  System,  17 91-1896. 

INTERNATIONAL  TRADE  AND   PROTECTIONISM 
Group  1 

Bastable,  C.  F. :    Theory  of  International  Trade. 
Bastiat,  F. :   Sophisms  of  Protection. 
Clare,  G. :    The  ABC  of  the  Foreign  Exchanges. 
Taussig,  F.  W. :    Tariff  History  of  the  United  States  and  Some 
Aspects  of  the  Tariff  Question, 


APPENDIX  It  431 


Group  2 


Ashley,  Percy :  Modern :   Tariff  History, 

Sumner,  W.  G. :  Protectionism. 

Patten,  S.  N. :   The  Economic  Basis  of  Protection, 

Wells,  D.  A. :  Practiced  Economics. 

List,  F. :  National  System  of  Political  Economy. 

Carey,  H.  C. :  Harmony  of  Interests. 

Ashley,  W.  J. :   The  Tariff  Problem, 

SOCIALISM 

Group  1 

Brooks,  J.  G. :   The  Social  Unrest, 
Ely,  R.  T. :  Socialism  and  Social  Reform, 
Howells,  W.  D. :  Letters  from  Altruria. 
Jaur^,  J.  L. :  Studies  in  Socialism.     (Translation.) 
Morley,  H.  (editor) :  Ideal  Commonwealths. 
Reeves,  W.  P. :    State  Experiments  in  Australia  and  New  Zea- 
land, 

Group  2 

Bernstein,  E. :  Evolutionary  Socialism.     (Translation.) 
^Marx,  Karl :  Capital.     (Translation.) 

Rae,  J. :  Contemporary  Socialism. 

Schaffle,  A.  E.  F. :    The  Quintessence  of  Socialism.     (Transla- 
tion.) 

Sombart,  W. :    Socialism  and  the  Social  Movement.     (Transla- 
tion.) 

Vandervelde,  E. :   Collectivism.     (Translation.) 

Walling,  W.  E. :  Progressivism  and  After  and  also  Socialism  of 
Today. 


432  APPENDIX  II 

LABOR:    ITS  POSITION,    ITS   CONDITIONS,   AND   ITS 
EARNINGS 

Group  1 

Bloomfield,  M. :   Readings  in  Vocational  Guidance. 

Carlton,  F.  T. :    The  History  and  Problems  of  Organized  Labor, 

Commons,  J.  R. :    Trade  Unionism  and  Labor  Problems. 

Gladden,  W. :   Working  People  and  their  Employers. 

Mitchell,  J. :   Organized  Labor. 

Toynbee,  Arnold  :    The  Industrial  Revolution  in  England. 

Wright,  C.  D. :  Industrial  Evolution  of  the  United  States. 

Group  2 

Report  of  the  United  States  Industrial  Commission. 

Report  of  the  Federal  Industrial  Relations  Commission. 

Annual  and  Special  Reports  of  the  United  States  Labor 
Bureau. 

Ely,  R.  T. :  Property  and  Contract  in  their  Relation  to  the  Dis- 
tribution of  Wealth. 

Hobson,  J.  A. :    The  Evolution  of  Modem  Capitalism. 

Schloss,  D.  F. :   Methods  of  Industrial  Remuneration. 

The  Pittsburgh  Survey.     6  vols. 

Jevons,  W.  S. :    The  State  in  its  Relation  to  Labor. 

Stimson,  F.  J. :  Handbook  to  the  Labor  Law  of  the  United 
States. 

Webb,  Sidney  and  Beatrice  (Potter) :  History  of  Trade-union- 
ism and  Industrial  Democracy. 

A  Documentary  History  of  American  Industrial  Society. 

Potter,  Beatrice :    The  Cooperative  Movem£nt  in  Great  Britain. 

Levasseur,  E. :    The  American  Workman.     (Translation.) 

Gilman,  N.  P. :   Profit-sharing. 

Ashley,  W.  J. :    The  Adjustment  of  Wages. 

Rogers,  J.  E.  T. :   Six  Centuries  of  Work  and  Wages. 

Brassey,  T. :   Work  and  Wages. 

Ryan,  J.  A. :  A  Living  Wage. 


APPENDIX  II  4n 

MONOPOLIES  AND   INDUSTRIAL   COMBINATIONS 
Group  1 

Ely,  R.  T. :  M(mopolies  and  Trusts. 

Jenks,  J.  W. :    The  Trust  Problem. 

Lloyd,  Henry  D. :   Wealth  against  Commonwealth. 

Von  Halle,  E. :    Trusts  and  Industrial  Combinations. 

Meade,  E.  S. :    Tru^t  Finance. 

Ripley,  W.  Z. :    Trusts,  Pools  and  Corporations. 

Stevens,  W.  S. :  Industrial  Combinations  and  Trusts. 

Group  2 

Report  of  the  United  States  Industrial  Commission,  Vols.  I 

and  II. 
Adams,  H.  C, :    The  Relation  of  the  State  to  Industrial  Action. 
Bemis,  E.  W. :  Municipal  Monopolies. 
Clark,  J.  B. :   Theory  of  Economic  Progress. 
Farrer,  T.  H. :    The  State  in  its  Relation  to  Trade. 
Cook,  W.  W. :   The  Corporation  Problem. 

TRANSPORTATION 
Group  1 

Hadley,  A.  T. :  Railroad  Transportation. 
Johnson,  E.  R. :  American  Railway  Transportation. 
Ripley,  W.  Z. :  Railway  Problems. 

Group  2 

Reports  (Annual)  of  the  Interstate  Commerce  Commission. 

Report  of  the  United  States  Industrial  Commission. 

Reports  of  the  Bureau  of  Corporations,  now  the  Federal  Trade 

Commission. 
Meyer,  B.  H. :  Railway  Legislation  in  the  United  States. 
Stickney,  A.  B. :   The  Railway  Problem. 
2f 


4d4  APPENDIX  II 

Dixon,  F.  H. :  State  Railroad  Control. 

Jeans,  J.  S. :   Waterways  and  Water  Transport. 

Johnson,  E.  R. :  Inland  Waterways. 

Johnson,  E.  R.,  and  Huebner,  G.  G. :    Railroad  Traffic  and 

Rates.    2  vols. 
Lewis,  G.  H. :  National  Consolidation  of  Railways. 
Newcomb,  H.  T. :  Railway  Economics. 
Ripley,  W.  Z. :  Railroad  Rates  and  Regidation.    2  vols. 

CORPORATIONS  AND   CORPORATION   FINANCE 
Gboup  1 

Cleveland,  F.  A. :  Funds  and  their  Uses. 

Lough,  W.  H. :  Corporation  Finance. 

Meade,  E.  S. :   Trust  Finance  and  Corporation  Finano$, 

Pratt,  S.  A. :   The  Work  of  Wail  Street. 

Group  2 

Report  of  the  Chicago  Conference  on  Trusts. 
Burdick,  F.  M. :    The  Essentials  of  Business  Law. 
Greene,  T.  L. :   Corporation  Finance. 
Cook,  W.  W. :    The  Corporation  Problem. 

Emery,  H.  C. :  Speculation  on  the  Stock  and  Produce  Exchanges 
of  the  United  States. 

COMMERCIAL   GEOGRAPHY 
Group  1 

Adams,  C.  C. :  A  Text-book  of  Commercial  Geography. 
Gregory,  H.  E.,  et  al. :   Physical  and  Commercial  Geography, 
Red  way,  J.  W. :  New  Basis  of  Geography. 
Trotter,  Spencer :   The  Geography  of  Commerce. 
Smith,  J.  R. :  Industrial  and  Commercial  Geography. 


APPENDIX  II  435 


Group  2 

Reports  of  the  Department  of  Commerce  and  Labor  (U.  S.), 
especially  Commercial  Relations  of  the  United  States; 
Commerce  Reports;  Monthly  Summary  of  Commerce 
and  Finance. 

Thirteenth  Census  of  the  United  States. 

Chisholm,  G.  G. :  A  Handbook  of  Commercial  Geography, 

Keltic,  J.  S. :  Applied  Geography. 

In  addition  to  the  books  mentioned  in  the  precedin'g"  para- 
graphs, students  will  find  certain  general  works  of  reference  of 
very  great  value.  These  may  be  listed  most  conveniently  under 
the  names  dictionaries,  periodicals,  and  general  treatises. 
Every  school  that  aspires  to  the  possession  of  a  working  library 
in  Economics  should  have  a  considerable  number  of  the  books 
in  the  following  list,  together  with  some  of  the  magazines  of 
most  general  use  in  the  subject.  In  the  first  two  groups  the 
books  and  magazines  respectively  are  given  in  the  order  in 
which  the  authors  would  recommend  their  purchase.  For  obvious 
reasons  it  has  not  been  deemed  best  to  do  this  in  the  case  of 
the  books  mentioned  in  Group  Three,  which  are  therefore 
given  in  the  alphabetical  order  of  their  authors.  The  student 
will  not  find  in  this  book  any  references  to  German,  French, 
or  Italian  authorities  that  have  not  been  translated.  Should 
he  have  occasion,  in  exceptional  cases,  to  refer  to  such  works, 
he  should  consult  the  bibliographies  that  are  to  be  found  in 
many  of  the  general  treatises  included  in  our  list. 

DICTIONARIES 

^  Dictionary  of  Political  Economy.  Edited  by  R.  H.  Inglis  Pal- 
grave. 

\/ Cyclopedia  of  Political  Science  and  Political  Economy.  Edited 
by  J.  J.  Lalor. 

vCyclopedia  of  Social  Reform.    Edited  by  W.  D.  P.  Bliss. 


436  APPENDIX  II 

Cyclopedia  of  American  Government.    Edited  by  A.  C.  Mc- 
Laughlin and  A.  B.  Hart. 
The  standard  encyclopedias  will  also  be  found  to  contain 
special  articles  on  very  many  economic  topics. 

PERIODICALS 

^  Publications  of  the  American   Economic  Association   and   the 

American  Economic  Review. 
s/  The  Quarterly  Journal  of  Economics. 
^The  Journal  of  Political  Economy. 

Political  Science  Quarterly. 
^  The  Yale  Review. 

^Annals  of  the  American  Academy  of  Political  and  Social  Science, 
V  Municipal  Affairs. 
V  The  Survey. 
^  Commercial  and  Financial  Chronicle, 

Bradstreet's.  • 

Dun's  Review. 

The  Bankers'  Magazine.     (American.) 


GENERAL   TREATISES 

Bullock,  C.  J. :  Introduction  to  the  Study  of  Economics. 

Devine,  E.  T. :  Economics. 
^    Ely,  R.  T. :    Outlines  of  Economics;    new  ed.,  rewritten  by 
R.  T.  Ely,  T.  S.  Adams,  M.  O.  Lorenz,  and  A.  A.  Young. 

Davenport,  H.  J. :  Elementary  Economics. 

Fisher,  I. :    Elementary  Principles  of  Economics. 

iFetteT,  F.  A. :    Principles  of  Economics. 
-^Gide,  C. :   Principles  of  Political  Economy.     (Translation.) 

Hadley,  A.  T. :  Economics. 
V^arshall,  A. :   Principles  of  Economics;   also  Marshall,  A.  and 
E. :    The  Economics  of  Industry. 

Nicholson,  J.  S. :  Principles  of  Political  Economy. 
^  Roscher,  W. :  Political  Economy.     (Translation.) 


1 


APPENDIX  II  437 

Seager,  H.  R. :  Introduction  to  Economics. 
\/Seligman,  E.  R.  A. :    Principles  of  Economics. 

Sidgwick,  H. :  Principles  of  Political  Economy. 
^Taussig,  F.  W. :  Principles  of  Economics. 
v^Walker,  F.  A. :  Political  Economy.     (Advanced  Course.) 


INDEX 


Abstinence  theory  of  interest,  344- 
346. 

Adulteration  of  goods,  85. 

Agricultural  stage,  33-36;  culmina- 
tion in  feudalism,  40. 

Agriculture  in  England  in  1760,  61- 
56. 

American  Federation  of  Labor,  321. 

Anarchism,  377. 

Arbitration,  industrial,  333 ;  com- 
pulsory, 334-355. 

Australia,  industrial  arbitration  in, 
333. 

Austrian  theory  of  interest,  346-350. 

Balance  of  trade.  See  International 
trade. 

Baltimore,  ground  rents,  297. 

Banking,  origin,  47-^8;  and  credit, 
244-259;  checks  and  notes,  245- 
249;  banks  and  clearing  houses, 
249-252;  system  of  the  United 
States,  252-256. 

Barter,  disadvantages,  38-39, 188,225. 

Bavaria,  Saints'  Days,  3. 

Bequests,  taxation,  412. 

Bills  of  exchange,  248. 

Bimetallism,  defined,  236-237 ;  Latin 
Monetary  Union,  237;  national 
and  international,  238-239. 

Bland-Allison  Act,  240. 

Bohm-Bawerk's  theory  of  interest, 
349. 

Bonds,  not  capital,  129. 

Bonus  system,  330. 

Book  credit,  249. 

Boycotts,  323. 

Brassage,  230. 

Brewery  Workers  of  America,  321. 


Business,  public,  385. 
Business.     See  Industry. 

Cannibalism,  causes,  29-31. 

Capital,  defined,  148;  a  factor  of 
production,  148-153 ;  capital 
goods,  149 ;  functions,  149 ;  origin, 
150 ;  formation,  151 ;  results,  152 ; 
fixed  and  circulating,  152 ;  free  and 
specialized,  153 ;  organization,  166, 
169 ;  increased  by  credit,  257-258 ; 
interest  on,  364-365. 

Census,  estimates  of  wealth,  112- 
113 ;  localization  of  industry,  167, 
168. 

Checks,  254-255. 

Child  Labor,  laws,  70 ;  Federal  Act, 
84-85,  287. 

Christian  Socialists,  379. 

Cities,  origin,  39. 

Civilization,  material,  defined,  22. 

Clearing  houses,  256-257,  264 

Climate,  influence  on  land  value,  298- 
299. 

Coal,  production  revolutionized,  63. 

Coins  and  coinage,  229-231;  bi- 
metallism, 236-238. 

Collectivism,  defined,  378. 

Commerce,  origin,  37-38.  See  also 
Industry. 

Commissions,  monopoly  regulation, 
218;  United  States  Industrial 
Commission,  325;  Federal  Indus- 
trial Relations  Commission,  325. 

Communism,  defined,  378. 

Competition,  beginnings,  46-47 ; 
growth,  77-82;  regulation,  83- 
88 ;  and  price,  193 ;  wastes,  373- 
374. 


439 


440 


INDEX 


Conciliation,  industrial,  333. 

Conjunctural  gains,  360. 

.-Consumption,  defined,  91 ;  wealth, 
95 ;  productive,  95 ;  relation  to 
production,  96 ;  economic  order  of, 
104-106;  Engel'slaw,  112;  spend- 
ing and  saving,  116-124;  luxu- 
rious, 120;  harmful,  121;  iinder- 
consumption,  130;  and  credit, 
259 ;   improvements,  305. 

Contract,  fundamental  institution, 
15-16. 

Cooperation,  160;  defined,  331;  in 
England  and  Scotland,  332 ;  pro- 
ductive and  distributive,  332 ; 
strength  and  weakness,  333. 

Copyrights,  14,  205. 

Corporations,  159 ;   taxes,  411. 

Cotton  industry,  change  in,  63. 

Credit,  economy  stage,  21 ;  origin, 
47-48;  and  banking,  244r-259 ; 
defined,  250-251 ;  mechanism, 
245-249 ;  institutions,  249-252 ; 
in  the  United  States,  252-256 ; 
Federal  Farm  Loan  Act,  256-257 ; 
clearing  houses,  257-258;  advan- 
tages, 258-259 ;  dangers,  259-260 ; 
public  loans,- 391. 

Crises,  explanation,  66-67,  132. 

Cultivation,  intensive  and  extensive 
margins,  303-306. 

Cvirrency  Act  of  1900,  240. 

Customs  taxes,  399-^01. 


Debts,  391.     See  also  Lroans. 

Demand,  104-114;  order  of  con- 
sumption, 104-106 ;  law  of  sub- 
stitution, indifference,  or  equi- 
marginal return,  106;  laws,  108- 
112;  influence  on  price,  196-201; 
labor,  314-315 ;  relation  to  supply, 
343. 

Differential  character  of  rent,  309. 

Diminishing  returns,  law  of,  138- 
142,  304. 

Diminishing  utility,  law  of,  98-102. 

Distribution,  defined,  291-292 ;  place 
in  economics,  291-292 ;  relation 
to  factors  of  production,  293-294. 


Division  of  labor,  162-166;  advan- 
tages, 164;  illustrated,  16-164; 
disadvantages,  165-166.  See  also 
Labor. 

Division  of  occupation,  161. 

Drafts,  247,  265-266,  268,  272. 

Duties.     See  Protectionism. 


Ei 
\/Ei 


Economic  history,  21-88 ;  stages,  22- 
26 ;  industrial  development,  early 
stages,  28-40. 

Economic  legislation,  in  England 
before  1760,  69-60;  changes  in, 
64r-73. 

Economic  life,  2,  3 ;  unit,  2-3. 

Economic  order  of  consumption, 
104-106. 

Economics,  relation  to  social  sciences, 
1-2  ;   defined,  2,  3 ;  divisions,  5-7. 

Economy,  defined,  2. 

Education,  economic  importance  of, 
325 ;  public,  387. 

Eminent  domain,  11. 
mployers'  Associations,  324. 

Engel,  Law  of  Consumption,  112. 

England,  Industrial  Revolution  in, 
51-73;  consumption,  113 ;  ground 
rents,  297 ;  agricultural  rents,  301 ; 
cooperation,  332 ;  national  expen- 
diture, 385. 
^Entrepreneur,  function,  157;  single 
entrepreneur  system,  159. 

Equi-marginal  return,  law  of,  106- 
107. 

European  War,  finance,  386. 

Evolution,  nature  of,  77. 

Exchange,  origin,  33,  178-181 ;  ma- 
chinery of,  180,  181 ;  subjective 
exchange  value,  185;  objective 
exchange  value,  186-188;  money, 
the  medium  of,  226,  227;  credit, 
246. 

Excise  taxes,  401-402. 

Expenditiire,  Engel's  law  of  family, 
112-114;  public,  384-397 ;  public 
finance  defined,  384 ;  magnitude, 
385;  growth,  386-387;  classifica- 
tion, 387-389;  objects  of,  in  the 
United  States,  389-390. 


INDEX 


441 


Exports  and  imports.  See  Inter- 
national trade. 

Fabian  Socialists,  379. 

Factories,  rise  of,  45;  factory  acts, 
70. 

Factors  of  production,  136-153. 

Faculty  theory,  393. 

Federal  Farm  Loan  Act,  256-257. 

Federal  Industrial  Relations  Com- 
mission, 325. 

Federal  Reserve  Act,  254. 

Federal  Reserve  Banks,  254-256. 

Fees,  392. 

Feudalism,  40. 

Finance,  public,  384-416;  defined, 
384.     See  also  Money. 

Fines,  definition,  12. 

Fishing  tribes,  29. 

Food,  consumption,  113,  114. 

Foreign  exchange,  262-277.  See  also 
International  trade. 

France,  budget,  385. 

Franchises,  proper  policy  regarding, 
86;  not  social  capital,  152;  rev- 
enue from,  413,  414. 

Free  coinage,  230. 

Free  lands,  influence  on  rent,  302. 

Free  trade,  281-286. 

Freedom.     See  Liberty. 

George,  Henry,  395. 

Germany,  insurance  and  old-age 
pensions,  336. 

Giddings,  F.  H.,  on  non-competing 
groups,  317. 

Gilds,  origin,  397-40,  46;  organiza- 
tion, 320.  > 

Gluts,  cause  of,  66 ;  relation  to  crises, 
132. 

Gold,  advantages  for  use  as  money, 
231. 

Goods,  inspection  in  England,  68- 
69 ;  in  the  United  States,  85 ;  and 
utilities,  91-96;  defined,  91-92; 
free  and  economic,  92,  93 ;  eco- 
nomic importance  determined,  107 ; 
production  of,  133 ;  capital,  149 ; 
representative,  152 ;  transfer,  178- 


181 ;  absolutely  scarce,  191 ;  com* 
petitively  produced,  193;  relation 
of  future  goods  to  interest,  348. 
See  also  Value. 

Government.     See  State. 

Great  Britain.     See  England. 

Greenbacks,  252. 

Ground  rents,  297. 

Handicraft  stage,  23,  36-40. 
History,  value  of,  for  economic  study, 

5-6,  21-22. 
Housekeeping,  economic  importance 

of,  123 ;  waste  in,  124. 
Hunting  and  fishing  stage,  23,  28- 

29;  tribes,  29,  31. 

Illinois,  consumption  in,  113. 

Immigration  and  population,  147, 
148. 

Imports.     See  International  trade. 

Inclosure,  meaning,  55-56. 

Income,  social,  292 ;  private,  292- 
293 ;  of  the  American  people, 
405. 

Income  tax,  federal,  403 ;  operation,- 
404-405;   experience,  406. 

Increasing  returns,  200. 

Indifference,  law  of,  106,  107. 

Industrial  Commission,  United 
States,  325. 

Industrial  development,  early  stages, 
28-40. 

Industrial  Revolution  in  England, 
51-73;  results,  65-73,  in  the 
United  States,  75-88. 

Industrial  stage,  43-49 ;  in  England, 
51-73 ;  in  the  United  States,  75- 
88. 

Industrial  Workers  of  the  World,  321 ; 
and  syndicalism,  380. 

Industry,  concentration  and  integra- 
tion, 78-81;  regulation,  86-88, 
216;  localization,  167-168;  or- 
ganization of  production,  169; 
state  management,  215-221,  376- 
377;   revenue  from,  385. 

Inheritance  tax,  406-407,  412. 

Injunctions,  323. 


442 


INDEX 


Inspection  of  factories,  335. 

Insurance,  compulsory,  335;  sick- 
ness, 336 ;  an  element  in  gross  in- 
terest, 352  ;   in  gross  profits,  359. 

Intensive  cultivation,  303, 

Interest,  339-355  ;  how  determined, 
339-340;  fallacious  views,  340- 
343 ;  theories,  343-350 ;  rate,  352- 
354 ;   usury,  354-355. 

Internal  revenue.     See  Revenue. 

International  banking.  See  Inter- 
national trade. 

International  payments,  262-267. 

International  trade,  262-288 ; 
nature  of,  262-277;  rate  of  ex- 
change, 264-265;  balance,  265- 
266 ;  relation  of  war  to,  270-272 ; 
value  in,  275-277;  advantages, 
277;  restrictions  on,  277-288. 
See  also  Protectionism. 

Inventions  and  the  Industrial  Revo- 
lution, 62-63. 

Investments,  117 ;  of  labor  and  capi- 
tal in  land,  138-142,  302-306. 

Iron,  production  in  England,  58,  63. 

Jevons,  W.  S.,  on  monopolies,  219- 
220. 

Knights  of  Labor,  321. 

Labor,  defined,  143 ;  a  factor  in  pro- 
duction, 143-148;  causes  of  effi- 
ciency, 144 ;  quantity,  144r-148 ; 
organization,  160-166;  simple  as- 
sociation effort,  161 ;  division  of 
labor,  161-166;  territorial  divi- 
sion, 167,  168;  and  population, 
169 ;  intensive  cultivation,  303- 
306 ;  and  wages,  312-336 ;  supply 
of,  313;  standard  of  living,  313; 
demand,  314;  classification,  317; 
children,  335.  See  also  Labor 
legislation  and  Labor  organizations. 

Labor  legislation,  purposes,  59-73, 
65.  72,  83-85.  335. 

Labor  organizations,  trade-unions, 
and  the  government.  71-72 ;  de- 
fined,   319;     origin.    320;     throe 


forms  of,  321;  growth,  321-322; 
strikes,  322 ;  boycotts  and  injunc- 
tions, 323-324;  Employers'  Asso- 
ciations, 324;  influence  of  the 
public,  324;  benefits,  325-326; 
education,  325 ;  standard  of  living, 
326;  weaknesses,  326-328;  wage 
payment,  329-332 ;  legislation, 
335 ;  insurance,  335. 

Laissez-faire,  67-68.     \y 

Land,  a  factor  in  production,  13ft- 
137 ;  three  services  of,  137 ;  or- 
ganization of  labor,  167-168;  rela- 
tion to  rent,  297;  quality,  297- 
300;  situation.  300-302;  rent  of 
agricultiwal  land,  302-303 ;  inten- 
sive cultivation,  303-306 ;  rent  of 
urban  land.  306-307 ;  value,  308 ; 
single  tax.  394-397. 

Large-scale  production,  170-172 ; 
compared  with  small-scale,  171- 
173. 

Latin  Monetary  Union,  237. 

Legal  tender.  227. 

Legislation.  See  under  Economic 
legislation,  and  Labor  legislation. 

Liberty,  personal,  16-17;  political, 
40. 

License  taxes,  411. 

Loan  and  trust  companies,  251. 

Loans,  market.  350-352  ;  interest  on, 
350-352;   pubUc,  391. 

Lockouts,  322. 

Luxury,  120,  121. 

TVlalthusian    theory    of    population,  a 

144. 
Management   of   industries   by   the 

state,  216. 
Manufacture,  changes  in,  57-58.  62- 

68.     See  also  Industrial  Revolution. 
Ma -ginal  expenses,  graphs,  197-201. 
Marginal     return.       See     Marginal 

utility. 
Mai'ginal  utility,  law  of  diminishing, 

9^102;   relation  to  demand,  110; 

laW  of  equi-raarginal  return,  140, 

141. 
Market  value,  189-191. 


INDEX 


443 


Marriage  and  population,  145,  313. 

Marx,  Earl,  scientific  socialist,  379. 

Massachusetts,  labor  legislation  in, 
83;  consumption  in,  113. 

Metals.     See  Money. 

Money,-  origin,  38-39,  225;  law  of 
diminishing  utility,  101-102 ;  225- 
241 ;  defined,  225 ;  functions,  225- 
227;  desirable  qualities  of  metal, 
227-229;  coinage,  229-230;  and 
governments,  230-231 ;  value,  231 ; 
quantity  theory,  232-233 ;  cost  of 
production,  233-234;  prices,  234; 
paper,  234-236;  Gresham's  law, 
236 ;  bimetallism,  236-237 ;  Latin 
Monetary  Union,  237 ;  silver,  237- 
238;  fluctuations,  238-239 ;  recent 
history,  239-241. 

Monopolies,  definedi__S2,_  203; 
natural,  82 ;  regulation,  86-88 ; 
ownership,  88;  monopoly  value, 
193,  203-221;  classified,  204; 
social,  204 ;  government,  205 ; 
natural,  206;  laws  of  monopoly 
price,  207-213 ;  second  class  of 
natural,  215;  public  ownership, 
216-219;  Jevons'a  criteria,  219, 
220. 

Mortality  and  population,  147. 

Mortgages,  not  capital,  129,  152. 

National  Civic  Federation,  325. 
National  Consumers'  League,  324. 
National  debts.     See  Debts. 
National  defense,  388. 
Nature,  a  factor  in  production,  137. 

See  also  Land. 
"Natural  agents,"  137,  138. 
Natural  rights,  9. 
Natural  treasures,  374-375. 
New  York  State,  revenues,  407-408. 
New  Zealand,  industrial  arbitration, 

334. 
Notes,    not    capital,    152;     defined, 

235;    instruments  of  credit,  246; 

promissory,  246. 

Old-age  pensions.     See  Pensions. 
Organization,    of    production,    156- 


176;  of  the  factors  as  a  group, 
165-160;  of  labor,  160-166;  of 
capital,  166-167;  of  land,  167- 
168 ;  conditions  determining,  169^ 
170 ;  of  exchange,  180,  181. 

Over-production,  general,  impossible, 
130-131. 

Ownership,  public,  216-219;  in- 
crease and  diffusion,  216  ;  economy 
and  efficiency,  216,  217;  purifica- 
tion of  politics,  217-218;  will 
overthrow  social  monopolies,  218. 

Paper  money,  234-235 ;  safety,  235- 
236. 

Partnership,  159. 

Pastoral  stage,  23,  30-33. 

Patents,  14-15,  205. 

"Patrons  of  Husbandry,"  87. 

Pensions,  387,  388 ;  old-age,  336. 

Personal  services,  92,  133.     „ 

Piecework,  329. 

Politics,  purification,  217-218. 

Poll  taxes,  408. 

Population,  Malthusian  thaliQ^144 ; 
checks,  145,  146;  growtnTT^RJ*- 
148 ;  and  division  of  labor,  169. 

Post  office,  a  natural  monopoly,  206, 
215. 

Poverty,  317. 

Price,  varies  with  demand,  110;  de- 
fined, 189;  how  determined,  190; 
market  and  normal  value,  190, 
191 ;  monopoly,  193 ;  and  competi- 
tion, 193 ;  laws  of  monopoly  price, 
207-213;  and  money,  231-234; 
relation  to  rent,  308. 

Private  enterprise,  proper  limits,  16, 
376-377. 

Private  property.     See  Property. 

Privileges,  guaranteed,  14-15. 

Production,  126-176;  varieties,  127; 
definition,  128 ;  over-production, 
130 ;  fluctuations,  132 ;  and  sacri- 
fice, 132,  133;  of  goods  and  serv- 
ices, 133;  factors,  136-153;  land, 
136-137 ;  diminishing  returns,  138- 
142 ;  labor,  143 ;  capital,  148-153 ; 
organization,  155-176;  large-scale 


444 


INDEX 


and  imall-soale  compared,  170- 
173 ;  cost  of  production  and  value 
of  money,  233-234 ;  relation  to 
consumption,  96;  improvements, 
305. 

Productivity  theory  of  interest,  343- 
344. 

Profit  sharing,  330. 

Profits,  358-365;  definition,  358; 
gross,   358-359,   361;    pure,   358- 

359,  361-364;     monopoly,    359- 

360,  363-364 ;  capitalization,  364- 
365. 

Progress  and  Poverty,  395. 

Property,  general  tax  on,  408-411. 

Property,  .nature,  9 ;  origin,  9-10 ; 
private,  justification,  9-10 ; 
strengthening,  10 ;  limitations,  10- 
13 ;  public,  meaning,  13-18 ;  im- 
portance, 293-295. 

Protection  of  labor,  327. 

Protectionism,  277-288 ;  objection 
to,  277-278;  argument  for,  278- 
281;  argument  against,  281-283; 
influence  of  tariffs,  283-285  ;  rela- 
tion to  labor,  285-286.  See  also 
International  trade. 

Prussia,  analysis  of  consimiption  in, 
113. 

Public  ezx>ttnditure.  See  £bn>endi- 
ture. 

Public  finance.     See  Finance. 

Public  loans.     See  Loans. 

Public  ownership,  216-219. 

Public  property.     See  Property. 

Public  revenue.     See  Revenue. 

Public  schools,  317. 

Purchasing  power,  108-109. 

Quantity  theory  of  money,  232-233. 

Rent,  296-309;  meaning,  297; 
ground  rent,  297 ;  quality  of  land, 
297-300;  situation  of  land,  300- 
302;  agricultural,  302-306 ;  urban, 
306-307;  relation  to  value,  307- 
308;  defined,  309;  and  pure 
profit,  362. 

Representative  goods,  1H2. 


Requisition,  11. 

Returns,  diminishing,  proportionate 
and  increasing,  138-142.  See  ala< 
Marginal  expenses  and  Margina 
utility. 

Revenue  Act,  403-406. 

Revenue,  public,  384-397;  publl 
finance  defined,  384;  classifica 
tion,  390;  public  loans,  391;  fee 
and  special  assessments,  392 
taxes,  392-397;  United  States 
399-410;  federal,  399-407;  state 
407-412 ;  local,  412-414 ;  system 
414-416. 

Revolution,  nature,  77. 

Ricardo,  David,  theory  of  rent,  309. 

Rights,  not  natural,  8 ;  fundamental 
8-18;  human,  17. 

Risk,  relation  to  interest,  362 ;  rela 
tion  to  iM-ofit,  359. 

Russia,  Saints'  Days  in,  3. 

Saints'  Days  in  Russia,  3 ;    in  Ba 

varia,  3. 
Saving,  and  consumption,   116-119 

by  hoarding,  117;   by  investment 

117. 
Savings  banks,  250. 
Saxony,  consimiption  in,  113. 
Scarcity,  relation  to  value,  191,  193. 
Scientific  management,  330. 
Scientific  socialists,  379. 
Scotland,  coSperation  in,  332. 
Seigniorage,  230. 
Services,  personal,  92,  133. 
Settlement,  Law  of,  59. 
Sherman  Act,  repeal,  240. 
Silver,  as  money,  231 ;    bimetallism 

236-239;     limitation    of    coinage 

237-238;   legislation  in  the  U.  S, 

240-241. 
Silver  Purchase  Acts,  240. 
Single  tax,  394-397. 
Slavery,  origin,  34;    disappearance 

40. 
Sliding  scale,  329. 
Smith,    Adam,    use   of   term    manu 

facturer,   57;    on  industrial   free 

dom,    61 ;     relations    with    Wati 


INDEX 


445 


62;    on  labor  laws,  66;    views  on 
protectionism,  279;    on  causes  of 
differences  in  wages,  318. 
Social  sciences,  1. 

Socialism,    relation   to    distribution, 
368-369 ;  characteristics,  369-371 ; 
claim  for  distributive  justice,  370- 
371 ;    an  extension  of  existing  in- 
stitutions, 371-372 ;  strength,  372- 
374,     377;      weakness.     3.75-377; 
classes,  378-380;  in  Europe,  380- 
381. 
Socialist  parties,  378-380. 
Socialists,  views  on  trusts,  175. 
Special  assessments,  392. 
Specific  and  ad  valorem  duties,  400. 
Spending,  economy  of,  119-124. 
Standard  of  living,  defined,  147 ;  and 
population,    147,    313,  ,314";     and 
labor  organization,  326.  * — " 

Standard,  The,  395. 
State,  passive  policy,   18;    reaction 
against,   67-73;    enterprises,   160; 
organization   of   production,    170; 
monopolies,  205;    management  of 
industry,     215-221 ;       regulation, 
216 ;  economy  and  efficiency,  216- 
221;    ownership,   217-220;     coin- 
age, 229 ;    money,  230-231 ;    labor 
commissions,   325;    finance,   384- 
416;     business,    385;     activities, 
387-389. 
Steam  engine,  invention  of,  62. 
Stock  companies,  159. 
Strikes:  322. 

Substitution,  Law  of,  106,  107. 
Supply,  labor,  144-148,  313 ;  capital, 
150;    relation  to  value,   190-191; 
of  money,  231-234 ;    and  demand, 
relation,  343. 
Syndicalism,  380, 

Tariff,  discussion,  277-288. 

Taxes,  defined,  392;  just,  393; 
faculty  theory,  393;  direct  and 
indirect,  394;  single  tax,  394- 
397;  customs,  399-401;  excise, 
401-402;  transactions,  402-403; 
income,  403^06 ;  inheritance,  406- 


407, 412 ;  poU  taxes,  408 ;  property, 
408-411;  corporations,  411;  li- 
cense, 411 ;  state  and  local,  415- 
416. 

Telford,  road  improvement,  64. 

Temperance  and  labor  organizations, 
325. 

Trade,  fluctuations  in,  66-67.  See 
also  International  trade. 

Trademarks,  14-15,  205. 

Trade-xmions.  See  Labor  organiza- 
tion. * 

Trade-union  labels,  324. 

Trades,  origin,  37;  and  commerce, 
37-38. 

Transactions,  taxes  on,  402-403. 

Transfer  of  goods.     See  Exchange. 

Transportation,  early,  48;  progress, 
58-59,  63-64. 

Treasury  notes,  241. 

Trusts,  relation  of  society  to,  173- 
176. 

Under-consumption,  130. 

Unearned  increment,  128,  396. 

United  Mine  Workers,  321. 

United  States,  economic  history,  21- 
88;  coinage,  237,  239;  currency 
legislation,  240-241 ;  banking  sys- 
tem, 252-257 ;  public  expenditure, 
386-387,  389 ;  revenues,  392,  399- 
416. 

United  States  Industrial  Commis- 
sion, 325. 

Urban  land,  rent,  306-307;  single 
tax,  394-397. 

Usiuv  interest,  354-355. 

Utility,  91-96;  defined,  91-92; 
varieties,  93-95 ;  law  of  diminish- 
ing, 98-102;  marginal,  98-102; 
varies  with  demand,  110;  relation 
to  value,  184. 

Value,  183-201;  defined,  183;  sub- 
jective, 183;  subjective  use,  184; 
determined  by  marginal  utility, 
184;  subjective  exchange,  185; 
objective  exchange,  186-188 ;  and 
price,     188;      market,     189-190; 


446 


INDEX 


normal  190-191 ;  and  supply, 
190-191 ;  absolutely  scarce  goods, 
191 ;  m onoi)oly,  193 ;  competition, 
193;  demand,  194-201;  monopoly, 
203-221 ;  frictional  elements,  201 ; 
money  :he  names  of,  226 ;  money 
the  receptacle  of,  227;  high 
specific  value  of  metals,  229;  re- 
lation U:>  rent,  307-309. 

Wages,  8>'stem,  origin,  45-46;  fix- 
ing, 60  312-336;  general,  312- 
316;  relative,  316-318;  methods 
of  pasrroent,  329-332. 

War,  expense  of,  388. 


Wastes,  economic,  120. 

Watt,  James,  invents  steam  engine, 

62. 
Wealth,  individual  and  social,   129, 

292 ;   census  estimates,  130. 
Wealth  of  Nations,  57,  61,  62,  318. 
West   Shore    Railway,    lease   of,    to 

New  York  Central,  86. 
Whitney,   Eli,    invents    cotton    gin, 

63. 
Women,  protected  by  Factory  Acts, 

70;   labor,  313. 
Woolen  industry,  revolution  in,  62- 

63. 
Workmen's  Compensation  Acts,  336. 


H 


6 


/ 


^j\\ 


Printed  in  the  United  Statea  of  Amerioa. 


A 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 
This  book  is  DUE  on  the  last  date  stamped  below, 
on  first  day  overdue 


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^UG  -^     1951 


MAR  7     1956  U 


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